Can a Hindu Undivided Family (HUF) Open a Demat Account?

As an income tax-paying individual, you would think that individuals are liable to pay income tax on their earnings. However, for income tax and any other financial market transaction such as investing in stocks, bonds, derivatives, etc., there are numerous other entities recognized by the Indian government. These entities have separate laws governing their legality, operations, obligations, and taxation. The government, under various laws, has clearly defined the rules that are to be followed by these entities.

Furthermore, as these entities are registered in India, they have the same rights as any other Indian citizen. The same applies if they want to invest in the financial market and realize profits by trading in various securities. One such widely known entity is the Hindu Undivided Family or HUF.

What is a HUF or Hindu Undivided Family?

A Hindu Undivided Family is a group of family members that consists of a common ancestor and his male descendants along with their wives and unmarried children. These family members register themselves as a single entity in whose name all future transactions are undertaken. The eldest coparcener (head of the family), which can be male or female, is known as the ‘Karta’ of the Hindu Undivided Family and is deemed responsible for handling all the family affairs.

HUF is the one in whose name all the securities purchased in the Indian financial market are held. In the event of the death of the Karta, the next senior-most member is nominated for being the succeeding Karta. There are no formal rules and regulations for nominating a new Karta in a HUF.

Basic criteria for a Hindu Undivided Family

There are some basic conditions to form and manage a HUF in India. They include:

  • A coparcener of only one member can not form a HUF alone.
  • As per new laws, if the immediate senior-most member is a female, she can be appointed Karta.
  • One male member, along with her female relatives, can form a HUF. For example, a father, his wife, and unmarried daughters can form a HUF.
  • A new member, after marriage to a HUF member, automatically gets included in the HUF.
  • Buddhists, Sikhs, Hindus, and Jain can form a HUF.
  • Once formed, a new bank account and a single PAN number are generated in the HUF’s name for taxation and banking purposes.

Advantages of Hindu Undivided Family

A Hindu Undivided Family is created majorly to save tax. As the HUF is issued a separate PAN number, the HUF can claim tax deductions and benefits. The extra PAN card allows the HUF to split the income earned from the five income heads within themselves, thus, reducing the total tax liability.

Furthermore, here are some other advantages of a Hindu Undivided Family:

  • It helps with the management of jointly owned or inherited property.
  • The income earned from assets goes to the HUF, and each individual doesn’t have to pay taxes.
  • The tax slabs for HUFs are the same as any individual, and it also qualifies for tax deductions under various income tax sections. HUFs also qualify for tax exemptions under Sections 54 and 54F regarding capital gains income.
  • HUFs can also make financial investments such as stocks, bonds, etc., or buy a new property.

HUFs and their right to invest

With the same rights as any other Indian citizen, HUFs also actively invest in the Indian financial market. The securities are held in the name of the HUF, and the transactions are done in the name of the HUF’s bank account and PAN Card. However, it is compulsory to have a trading and Demat account to invest in securities.

What is a Demat account?

A Demat account is also known as Dematerialized account. In other words, it converts or dematerializes your physical shares in electronic format. With a Demat account, you can hold a wide variety of investments such as bonds, equity shares, government securities, mutual funds, and exchange-traded funds.

Like a bank account, a Demat account is either credited or debited each time you buy or sell shares of a company. It not only eliminates unnecessary paperwork but also helps streamline the process of share trading. All of the Demat accounts in India are maintained by two organizations, namely National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

Can a HUF open a Demat account?

Yes, HUFs need to open a Demat and trading account as the registered entity would also need to hold securities after purchasing them. Furthermore, the transactions done to purchase these securities demand the opening of a trading account. A HUF can open Demat account with any stockbroker such as IIFL in India. The Demat account opening for HUF provides the following benefits to a HUF:

  • Allowing the HUF to invest in securities in the name of the family.
  • Tax benefits on the income earned through investments up to Rs 2.5 lakhs.
  • It can increase the chances of getting an IPO allotment as it makes up for a separate Demat account than the personal ones of the family members.
  • Increased buyback benefits if the HUF is eligible for retail reverse quota.

Steps required to open a Demat account in case of HUF

Currently, HUF members cannot open a HUF Demat account online. The HUF Demat account opening requires the members to visit the stock broker’s office. In case you want to open a Demat and trade with IIFL, you must bring the following documents: :

  • Pan Card of the HUF along with signature and HUF seal.
  • HUF address proof (bank statement or bank passbook).
  • Self-attested copy of Karta PAN Card.
  • Self-attested copy of Karta address proof.
  • Self-attested copy of Coparcener or Member PAN Card.
  • Self-attested copy of Coparcener or Member addresses proof.
  • Personalized canceled cheque with printed HUF name.
  • Bank account proof of HUF for adding to the trading account.

Once you have submitted the above-mentioned documents, IIFL will open a HUF Demat account within 24 hours.

Forming a HUF can be a great way to manage your ancestral assets, invest in the financial market and save a considerable amount of tax. However, as HUF is considered a separate entity, you need to open a Demat account for HUF separately. If you are a HUF or are in the process of forming one, you can visit IIFL’s website or contact its advisors to guide you on how you can open a HUF Demat account and start investing.

Frequently Asked Questions Expand All

The senior-most member of the Hindu Undivided Family is called the Karta. However, in the event of the death of Karta, a new Karta is appointed that is the next senior-most member of the family, male or female. There are no formal guidelines pertaining to the appointment of the Karta, and the members can appoint any senior member as per their preference.

The powers of Karta are as follows:

  • Power to Represent
  • Power to Manage
  • Power over Income
  • Power of Alienation
  • Power to Compromise
  • Power to Contract Debt
  • Power to Invest
  • Power to create a Legal Contract

HUFs are taxed the same as individuals and are exempted up to Rs 2.5 lakhs in Income Tax. Furthermore, as they can distribute the tax liability among the family members, they pay less tax than individuals.