New tax regime for Hindu Undivided Families could reshape estate planning from 2026

Changes to the default tax regime for HUFs from April 2026 threaten significant forfeits of deductions, complicating compliance and restructuring amidst evolving tax laws.

For Hindu Undivided Families, the key tax question for income earned from 1 April 2026 is no longer simply whether the default regime carries lower rates, but whether those lower rates still leave the family better off once reliefs have dropped away. That calculation has to be done at HUF level, not member by member, because an HUF is treated as a separate taxable person with its own PAN, return and slab benefit. (help.myitreturn.com)

Part of the confusion comes from the overlap between two laws. Returns being filed in 2026 for Assessment Year 2026-27 still sit under the Income-tax Act, 1961, while income arising from 1 April 2026 to 31 March 2027 falls into Tax Year 2026-27 under the Income-tax Act, 2025, with returns for that period due in 2027. The department’s current guidance shows that the new regime had already become the default for HUFs under section 115BAC from AY 2024-25; from the new tax year, the equivalent framework continues under section 202 of the 2025 Act, with transitional protection under section 536. (help.myitreturn.com)

On the face of it, the default structure is attractive. The nil band runs to ₹4,00,000, then 5% applies up to ₹8,00,000, 10% up to ₹12,00,000, 15% up to ₹16,00,000, 20% up to ₹20,00,000, 25% up to ₹24,00,000 and 30% above that. But the headline rate is only part of the bill: surcharge still applies, and CA Club India notes that while surcharge on ordinary income can rise as high as 37% under the old regime, the new regime caps it at 25%. In both systems, Health and Education Cess is charged at 4% on income tax plus surcharge. (caclubindia.com)

The real pinch comes from what disappears if an HUF stays in the default regime. The Income Tax Department’s HUF guidance for AY 2026-27 shows that the old regime still carries a combined ₹1,50,000 deduction under section 80C for items such as life insurance premiums, provident fund contributions, tuition fees, National Savings Certificates and housing-loan principal. It also lists section 80D relief of ₹25,000 for members below 60, ₹50,000 for members above 60, plus up to ₹50,000 for medical spending on a senior citizen member where no premium is paid, and section 80DD deductions of ₹75,000 or ₹1,25,000 depending on the severity of disability. Under the default regime, those long-used breaks generally fall away. (incometax.gov.in)

Property treatment makes the comparison even sharper. Under the old regime, the department says an HUF with a self-occupied home can claim up to ₹2,00,000 of housing-loan interest under section 24(b). Under the default regime, that relief is not ordinarily available for a self-occupied property. For let property, interest may still be claimed, but any resulting house-property loss cannot be set off against income under other heads or carried forward, according to the department’s filing guidance and Dr Suresh Surana’s analysis. For a family using a home loan or carrying rental-property losses, that can wipe out much of the benefit of the softer slab structure. (incometax.gov.in)

Another trap is the assumption that an HUF automatically gets the same low-income rebate as an individual. It does not. Surana says an HUF is not entitled to the rebate under section 156 of the 2025 Act, which corresponds to the old section 87A relief. The department’s own AY 2026-27 page frames that rebate as one available to resident individuals, with the new-regime rebate limit shown at up to ₹60,000 where taxable income does not exceed ₹12,00,000. In practice, that means an HUF cannot safely assume that taxable income below ₹12 lakh will reduce its final tax to nil. (taxguru.in)

The rules on changing regimes are also uneven. For non-business HUFs, the department says the choice can be made in the return each year, provided it is filed by the due date. For HUFs with business or professional income, the decision is far stickier: opting out of the default regime ordinarily carries forward, and the route back into the new regime is generally available only once. Surana’s TaxGuru note says that under the 2025 framework, Rule 136 shifts the procedure into the return filed under section 263(1), replacing the separate Form 10-IEA process that applied under the earlier law. (incometax.gov.in)

For some families, the issue will extend beyond deductions into succession and restructuring. CA Club India points out that only a complete partition of an HUF is recognised for income-tax purposes; income earned before a partition is taxed in the HUF, income after partition is taxed in the members’ hands, and if partition happens only after the tax year ends, the whole year’s income remains taxable in the HUF. Partial partitions have not been recognised since 31 December 1978. That matters because the Karta is not just comparing slab rates, but deciding for a separate taxable entity whose income, assets and compliance history stand apart from those of individual relatives. (caclubindia.com)

The practical message from the wider coverage is that HUF tax planning for 2026-27 is less about chasing the default option and more about rebuilding the maths from scratch. Whalesbook’s consumer-facing advice is that the Karta should project income, deductions and losses before filing, while Surana argues for a side-by-side computation under both regimes. Families that relied heavily on section 80C, section 80D or housing relief may discover that the lower published rates flatter to deceive; others, especially those with fewer deductions and higher income, may still come out ahead under the default system. (whalesbook.com)