You would assume that people who pay income taxes are responsible for paying income tax on their earnings. However, the Indian government has recognized a number of additional companies for income tax and other financial market transactions, such as investing in stocks, bonds, derivatives, etc. Different laws apply to these entities in terms of their legal status, duties, liabilities, and taxes. The government has outlined the regulations that these organizations must abide by in a number of statutes.
These entities also enjoy the same rights as any other Indian citizen because they are registered in India. The same holds true for those who wish to trade in different assets to invest in the financial market and make money. Among these is the Hindu Undivided Family, or HUF, a well-known organization.
What is a HUF or Hindu Undivided Family?
A Hindu undivided family is a collection of relatives made up of the male ancestor's wives and children who are not married, as well as their common ancestor. These family members register as a single legal entity, using that name for all upcoming transactions. In Hindu Undivided Families, the eldest coparcener, or head of the family, is referred to as the "Karta" and is in charge of all family matters. This person can be either male or female.
All securities bought on the Indian financial market are held in the name of HUF. The member with the highest seniority is the one selected to succeed the Karta in the case of the Karta's death. In a HUF, there are no official guidelines or procedures for proposing a new Karta.
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What is a Demat Account?
An electronic digital repository that enables people to electronically store and manage their assets and securities, including stocks, bonds, mutual funds, and Exchange Traded Funds (ETFs), is known as a Demat account, short for Dematerialised account. It provides a safe, practical, and paperless way to trade and participate in the financial markets as a replacement to owning physical certificates. Smooth transactions are made possible via a Demat account, which connects an investor's assets to their own Demat Account Number (DP ID). It is a vital tool for modern investors since it also provides advantages including less paperwork, faster transaction settlement, and simpler access to financial products.
Can a HUF Open a Demat Account?
Indeed, HUFs can open a Demat account and trading accounts as the registered business must retain stocks after acquiring them. Moreover, creating a trading account is required for the transactions made to acquire these assets. HUF is able to create a Demat account with any Indian brokerage. The benefits of creating a Demat account for HUF are as follows:
- Enabling the HUF to make securities investments under the family's name.
- Benefits from taxes on investment income up to Rs 2.5 lakhs.
- Since it compensates for having a different Demat account from the family members' personal ones, it may raise the likelihood of receiving an IPO allotment.
- Advantages for buybacks that are increased if the HUF qualifies for the retail reverse quota.
Benefits of opening a Demat account for a HUF
Hindu Undivided Family (HUF) formation primarily serves as a tax-saving mechanism. Obtaining a separate PAN number enables the HUF to claim tax deductions and benefits, allowing for the distribution of income among its members across various income heads, thereby reducing the overall tax liability.
Moreover, HUFs offer additional advantages:
- Facilitates efficient management of jointly owned or inherited property.
- Consolidates income from assets under the HUF, relieving individuals from separate tax obligations.
- HUFs follow the same tax slabs as individual taxpayers and are eligible for deductions under various income tax provisions. They also qualify for tax exemptions under Sections 54 and 54F pertaining to capital gains.
- HUFs have the flexibility to make diverse financial investments, including stocks, bonds, etc., or acquire new properties.
Steps Required to Open a Demat Account in Case of HUF
At present, establishing a HUF Demat account online is not feasible for members. The process necessitates a physical visit to the stock broker's office. If you intend to initiate a Demat account and engage in trading, it is imperative to provide the following documentation:
- HUF PAN Card bearing the HUF seal and signature.
- Valid HUF address confirmation (e.g., bank statement or passbook).
- Self-attested copy of Karta's PAN Card.
- Self-attested copy of Karta's address verification.
- Self-attested copy of Coparcener or Member's PAN Card.
- Self-attested copy of Coparcener or Member's address validation.
- Personalized cancelled check imprinted with the HUF name.
- Evidence of HUF bank account for linkage to the trading account.
Upon submission of the aforementioned documents, The stock broker will process the opening of your HUF Demat account within a span of 24 hours.
Investing in the financial market, managing your ancestors' possessions, and reducing your tax liability may all be accomplished by forming a Hindu Undivided Family (HUFU). But as HUF is regarded as a distinct entity, you must register a Demat account for HUF independently. Visit a stock broker website or get in touch with its advisers if you're already a HUF or are in the process of becoming one to learn how to create a HUF Demat account and begin investing.
FAQs HUF Demat Account
Documents needed include HUF PAN Card, address proof, Karta's PAN and address proof, Coparcener or Member's PAN and address proof, personalized cancelled cheque, and HUF bank account proof.
Currently, HUF members must physically visit the stock broker's office as online HUF Demat account openings are not available.
A Demat Account streamlines the management of securities, facilitates paperless transactions, and allows for efficient tracking of investments for the HUF.
Yes, a HUF can have multiple Demat Accounts, but it is advisable to consolidate holdings to simplify tracking and management.
There is no specific limit on the number of members in a HUF for opening a Demat Account, but it must have at least one Coparcener (co-manager) to function.