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I have built an HTPC with H81I-PLUS and G3250.
This cpu has Intel HD Graphics but not sure if it is good enough as HD4000 or HD4400.
What is infact the difference between these intel GPUs and do I need to consider adding a video card to better handle HD playback ? (I do not game)
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It'll work very well for a HTPC. You don't need to add a video card.
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How is the GPU in the G3250 different than those in I3/I5 processors ?
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It's not as capable for gaming.
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The biggest difference is support for full 3D.
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In my experience you're better off going pentium + dgpu(like r7 250 passive) for livingroom-gaming so like dougie said 3d is the best reason for getting a i3/i5(hd2/3/4/5xxx)
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I understand a dedicated GPU is a must for gaming or 3D with G3250 processor, but will I be better off even without gaming and 3D, only 1080P playback or the G3250 can handle that and a DGPU won't improve anything ?
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For your stated needs the Intel HD Gpu will do the job.
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Is there a need to install any codec packs to improve video quality with Windows 8.1 ?
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*sighs* No codec packs have nothing to do with it being HDMI all codec packs do is allow those media players like Media Player Classic-Home Cinema to playback video and audio. The reason you don't need one with XBMC/Kodi is because the application has a number of codecs built into it allowing for playback of almost anything. And besides I don't think XBMC/Kodi can even make use of external codec packs.
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fritsch
Team-Kodi Developer
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xbmc uses ffmpeg which "provides" all our "codecs".
First decide what functions / features you expect from a system. Then decide for the hardware. Don't waste your money on crap.