How you can save tax on mutual funds by forming an HUF unit

An HUF has its own permanent account number and files tax returns independently of its members

- Sashind Ningthoukhongjam

Last week, a man attacked a bank manager in Gujarat over the tax deduction on his fixed deposit interest. A video of the incident has gone viral on social media platforms, with netizens lamenting the customer's unruly behaviour as well as the country's tax system.

Taxes can hurt, but one can be smart about them.

One of the many ways to save taxes is to create a family unit and pool assets to form a Hindu undivided family (HUF). An HUF has its own permanent account number (PAN) and files tax returns independently of its members.

"Think of an HUF like creating a separate individual with a PAN card. That way, if you can put some corpus/investments in the HUF, they will enjoy most benefits an individual gets, like the basic exemption of ₹3 lakh under the new tax regime, up to ₹1.5 lakh deduction under section 80C, etc.," said Nitesh Buddhadev, a chartered accountant and founder of Nimit Consultancy.

To be sure, a married couple with at least one child can open an HUF account. Only Hindus, Buddhists, Jains, and Sikhs can opt for this.

An HUF has a karta, coparceners and other members. The karta is authorized to carry out transactions and sign cheques on behalf of the HUF. Coparceners are born into an undivided family, such as a father and a son or a daughter. Those coming from outside the family through marriage, like a mother and wife, are called members.

Tax savings

Let's say a husband and a wife earn ₹10 lakh and ₹15 lakh, respectively, and part of their assets came from inheritance. They have invested in mutual funds/stocks and booked a profit of ₹7.5 lakh each (total of ₹15 lakh) this year.

Assuming they've opted for the new tax regime and booked the profits from equities after a 12-month holding period, the couple's total tax liability would be ₹3.36 lakh for the year (see graphic).