Tax saving on mutual funds as Hindu Undivided Family: Here's how to do it

Income is taxed separately from individual incomes, preventing clubbing and reducing the likelihood of higher tax brackets

A Hindu Undivided Family is recognised as a separate legal entity, allowing it to enjoy tax benefits that individual family members cannot avail of on their own. We write how an HUF can lead to substantial tax savings, particularly in mutual fund investments.

 

"A Hindu Undivided Family is a popular mechanism for tax planning, offering benefits like slab rate taxation and additional deductions under Chapter VIA, such as Section 80C (if HUF opts for the old tax regime). Since HUFs are taxed similarly to individuals, they provide significant tax-saving opportunities,” said Chintak Shah, vice-president, Anand Rathi Wealth Limited.

 

 

“Section 64 mandates that income from assets transferred to an HUF is still taxed in the transferor’s hands. Additionally, HUFs can trigger future conflicts among members and concentrate asset control with the Karta. While beneficial, creating an HUF requires careful consideration beyond tax savings,” Shah said.

 

Sujit Sudhakar Bangar, founder of TaxBuddy.com, explained the tax implications:

 

Consider a scenario where a family earns the following income: Rs 500,000 in gross salary (reduced to Rs 425,000 after standard deductions), Rs 200,000 from short-term capital gains (STCG) taxed at 20 per cent, Rs 800,000 from long-term capital gains (LTCG) taxed at 12.5 per cent, and Rs 50,000 in interest income.

 

Tax implications for an individual:

 

Taxable salary: Rs 425,000 (after Rs 75,000 standard deduction). The first Rs 300,000 is exempt and Rs 125,000 is taxed at 5 per cent, resulting in Rs 8,750 tax.

 

STCG tax: Rs 200,000 taxed at 20 per cent, resulting in Rs 40,000.

 

LTCG tax: After the Rs 125,000 exemption threshold, Rs 675,000 is taxed at 12.5 per cent, amounting to Rs 84,375.

 

Rebate under section 87A: Rs 8,750, reducing the total tax liability to Rs 124,375 before cess.

 

Cess: Adding 4 per cent health and education cess (Rs 4,975), the total tax payable is Rs 129,350.

 

Tax implications for an HUF:

 

An HUF enjoys its own basic exemption limit of Rs 300,000. The STCG of Rs 200,000 is completely offset against this exemption, resulting in no tax liability for this component.

 

For LTCG, after the Rs 125,000 exemption threshold and utilising the remaining Rs 100,000 of the basic exemption, the taxable LTCG is Rs 575,000. This is taxed at 12.5 per cent, resulting in Rs 71,875.

 

Cess: Adding 4 per cent health and education cess (Rs 2,875), the total tax payable for the HUF is Rs 74,750.

 

Savings through HUF: By routing mutual fund investments through an HUF, the family saves Rs 54,600 in taxes compared to individual taxation.

 

Advantages of HUF for Mutual Fund investments

 

Independent taxation: Income from mutual funds under an HUF is taxed separately from individual incomes, preventing clubbing and reducing the likelihood of higher tax brackets.

 

Tax exemptions and slabs: An HUF can utilise the Rs 300,000 basic exemption and separate slab rates for tax optimisation.

 

Efficient wealth creation: Investments in mutual funds under the HUF structure grow tax-efficiently, benefiting from compounding and long-term wealth management strategies.

 

Family financial planning: Income generated by an HUF can be reinvested or used for family needs, such as purchasing property or other assets.