Does HUF Open a Demat Account: Things to know

Introduction

Nowadays, creating a demat account online has become a simple and convenient process. Most people think that only individual investors can open demat accounts.  However this is not true, Hindu Undivided Family (HUF) can also take advantage of this opportunity.

A HUF, which is a unique family structure in India, can benefit from having a demat account to manage and consolidate its investments. This article will explain some basic things about HUFs and the process of HUF account opening.

What is a HUF or Hindu Undivided Family?

A Hindu Undivided Family, or HUF, is essentially a family group that comes from the same ancestors. It's recognized by Indian law as a single entity, which means the family can do business and handle finances just like any person would.

The head of this family group is called the "Karta," and traditionally, this role was held by the eldest male member. However, now, women can also be the Karta.

All the investments and financial dealings are done in the name of the HUF. If the current Karta passes away, the next oldest family member usually takes over. There aren't any strict rules for this; it's more about family agreement and following tradition.

Basic Criteria for a Hindu Undivided Family

A Hindu Undivided Family is a unique legal and tax entity under Indian law. Here are the basic criteria for an HUF:

• Members: An HUF consists of all persons lineally descended from a common ancestor, including their wives and unmarried daughters. A minimum of two male members in the family is required to form a HUF.
• Formation: HUF cannot be created under a contract; it is created automatically in a Hindu family. Jain and Sikh families, even though they are not governed by the Hindu Law, are treated as HUF under the Act.
• Ancestral Property: Members of the HUF should have inherited ancestral property. Everyone has the same rights to use and share this property equally.
• Karta: The most senior member of the family is known as Karta, who is responsible for all the affairs of the HUF.
• Automatic Membership: Any child born into the family automatically becomes a member of the HUF.
• Legal Status: According to the Income-tax Act of 1961, the HUF is considered a ‘person’ for tax purposes and is treated as a separate entity when it comes to assessments.
• Taxation: HUF is taxed separately from its members. This means it can take advantage of tax deductions or exemptions just like an individual would.

Advantages of Hindu Undivided Family

Here are some key benefits of HUF:

• Effective Management: The Karta, or head of the family, has complete authority and makes all the decisions, ensuring everything is managed well.
• Perpetual Existence: Just like a company, the existence of a HUF is perpetual. Even if a member of the Karta dies or retires, the HUF remains unaffected.
• Tax Benefits: HUF is taxed separately from its members, allowing it to claim deductions or exemptions allowed under the tax laws separately. For example, all members as well as the HUF can claim a deduction for Section 80C.
• Asset Consolidation: HUF allows for the consolidation of family assets and properties under a single entity, making it easier to manage and transfer wealth within the family.
• Limited Liability: The liability of the members has been limited to only their share of the property.
• Additional Exemptions: HUFs can avail of a basic tax exemption of ₹2.5 lakhs, and claim an additional tax deduction of ₹25,000 (₹50,000 for senior citizens) on premiums of health insurance of the members of the HUF – self, wife, dependent children, and parents are allowed under section 80D. Apart from this, income tax deductions on house loan tax, educational loans, etc. are also allowed for HUFs similarly for individual taxpayers.

Documents Required for Opening a Demat Account by HUF

Here are the important HUF account opening documents you need:

• PAN Card: A copy of the HUF’s PAN card with the HUF seal and signature.
• Address Proof: Address proof of the HUF, verified by seal and signature. This could be a bank passbook or the latest bank statement.
• Karta’s Documents: Self-attested copies of Karta’s PAN card and address proof.
• Coparceners’ Documents: Self-attested copies of the PAN cards of coparceners or members.
• Bank Account Proof: A proof of the HUF’s bank account for linking with the Demat account. This could be a personalized canceled cheque with the company name printed on it, or a bank statement or bank passbook copy with the bank account number, MICR, and IFSC code clearly visible.

Step-by-Step Process to Open a Demat Account for HUF

Well you already know the answer to “can HUF open demat account.” Here’s a step-by-step guide how to open HUF account for a Hindu Undivided Family:

• Step 1: You can open a Demat account with any stock broker or bank that offers this service.
• Step 2: The documents required to open a HUF account depend on the KYC status of the HUF. We have already mentioned the necessary documents you need to open the account.
• Step 3. Fill out the application form provided by the broker or bank. The form should be signed by the Karta of the HUF.
• Step 4. In-Person Verification (IPV) is a process where the broker or bank verifies the documents and the details provided by you.

Remember that the Demat account is usually opened in the name of the Karta, which consolidates the HUF’s financial operations under a single identity.

Benefits of Opening a Demat Account for HUF

Opening a Demat account for a Hindu Undivided Family offers several benefits.

1. Investment Opportunities: HUFs can invest in a variety of financial instruments, including stocks, mutual funds, and bonds. This diversified investment approach helps in optimizing returns and managing risks effectively​.
2. Convenient Management: HUF Demat accounts facilitate easier management of family investments. The Karta, or head of the family, manages the account, ensuring that all investments are tracked and managed efficiently, benefiting the entire family​.
3. Tax Benefits: An HUF is treated as a separate tax entity, enjoying a basic tax exemption of ₹2.5 lakhs under the old tax regime and ₹3 lakhs under the new regime. This allows for significant tax savings when income is split between the HUF and individual family members.