HUF (Hindu Undivided Family) is a separate entity and separate taxpayer in the Income Tax Act. It is a group of family members who earn income jointly, so it is difficult to divide the income among all the family members. Therefore, a HUF is formed in which the head of the family is referred to as the Karta and which also includes all lineal male descendants as well as their wives and daughters who are not yet married.
HUFs are governed by various rules and laws, whether in the areas of inheritance, investment, taxation, marriage, etc. This article is about whether HUFs can trade and invest in the Indian capital market by opening a HUF trading and demat account. If yes, what is the procedure to open a HUF demat account, what documents are required to open a HUF account, and more?
What is Hindu Undivided Family or HUF?
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HUF stands for Hindu Undivided Family is a group of family members descended from a common ancestor. Under Hindu law, the HUF includes all male descendants including their wives and unmarried children. The eldest male member is the head of the family, known as “Karta” who is responsible for all family affairs.
The HUF is recognized as a single entity and all transactions are made in the name of Karta HUF. All other male members of the family are referred to as co-heirs or coparceners who receive the right to ancestral property by birth. In the event of the Karta’s death, the next senior-most male family member shall be named or nominated as the Karta’s successor. If there is no male, the oldest female takes the role of karta.
Can HUF Open a Demat Account?
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Now the question arises whether HUF can trade in the Indian capital market. The answer is certainly "yes." HUF enjoy the same rights as an individual Indian citizen, i.e. they are allowed to trade or invest in shares by opening a trading and demat account. HUF is considered a single entity/unit from the family members, so HUF is issued with a separate PAN card number.
HUF demat account can be opened with any stockbroker by providing the PAN card and bank proof in HUF's name. The demat account is opened in Karta's name, therefore Karta must also have a PAN card. HUF's demat account is not eligible for BSDA (Basic Service Demat Account) as this facility is only available for an individual's account.
HUF can hold any securities like shares, exchange-traded funds (ETFs), bonds, mutual funds etc. in dematerialized form. Any purchase or sale transaction will be processed through HUF's bank account.
How to open Trading and Demat Account for HUF?
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Unlike regular accounts where an individual can open an account online, a HUF demat account can only be opened offline. The reason for this is that all family members must be present at the stockbroker's premises.
To open a HUF demat and trading account, the duly signed account opening form (Equity and commodity) and the required documents must be sent to the broker’s office via courier. Karta must sign the account opening form and all other documents. The documents will then be checked or reviewed by the customer service team and if the information is found to be correct, the trading account will be opened in the name of HUF and you will be informed regarding the same.
HUF Demat Account Opening Documents
To register HUF KYC for demat account opening, the following documents are required:
- A PAN card copy of the HUF with signature and HUF seal.
- HUF address proof with seal and signature: Bank passbook or latest bank statement.
- Self-attested PAN card copy of karta and coparceners.
- Self-attested address proof copy of karta and coparceners: Driving license, voter ID, Aadhaar, passport, etc.
- Self-attested copy of Coparcener or Member PAN card.
- HUF bank account proof: Personalized canceled cheque with printed HUF name, bank statement, or bank passbook with the account number, MICR, and IFSC code.
- HUF Income proof to trade in the derivative segment: the latest 6 months bank statement or passbook of the HUF account, latest ITR acknowledgment, HUF DP holding statement, and latest P&L statement.
HUF Trading Account Benefits
- Income tax benefits: HUF holds a separate identity from their members and enjoys a tax exemption of upto Rs 2.5 lakh income earned on investment.
- It helps to manage ancestral assets in a great manner.
- HUFs are eligible or qualify for all tax benefits under 80C, 80D, 80G, etc.
- HUF can own a residential house as a separate entity and can also take a loan to buy a residential house. HUF can avail of tax benefits up to Rs 1.5 lakh under section 80C for repayment of the loan and up to Rs 2 lakh deduction for interest on the loan.
- HUFs are also eligible for capital gain tax exemption under sections 54 and 54F.
- Investment in securities, shares, mutual funds, etc. in the name of HUF.
- High chance of IPO allotment as HUF has a separate trading and demat account and can apply for IPO other than family members.
- HUF can also apply for a buyback of shares in the name of the family.
HUF Trading Disadvantages
- HUF are the family assets and all the family members have an equal right on the joint property.
- HUF being a separate identity in Income Tax Act has to file additional returns.
- Only Hindu and Hindu Dissidents like Jain, Buddhist, and Sikh can form HUF thus, Muslim, Jewish, and Christian families cannot be a part of HUF.
- HUF cannot open a Public Provident Fund (PPF) Account
Best Brokers to open HUF Account
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In India, many top discount brokers like Zerodha, Upstox, Fyers, etc. as well as full-service brokers like HDFC Securities, ICICI Direct, IIFL Securities, etc. allow HUFs to open a trading account. The fees for opening a HUF account may vary from broker to broker. However, the brokerage charges are the same as the brokerage applicable on an individual trading account opened by a resident.
Discount brokers charge a flat fee for trading in different segments, regardless of the amount traded. Full-service brokers, on the other hand, charge traditional percentage-based brokerage fees. Therefore, HUF can choose the best discount brokers to open a HUF trading and demat account.
Zerodha, the largest discount stockbroker in the country, charges Rs 500 for equity trading account and Rs 800 for equity and commodity trading account opening in HUF’s name. However, the brokerage charges are just Rs 20 flat fee. Upstox and Fyers also follow a similar pricing model with a maximum of Rs 20 per traded order as the brokerage fee.
