Save Taxes on Mutual Funds by Forming HUFs, Know How?
Taxes often come across as heavy burdens, but there are ways to lighten the load and maximize opportunities as much as possible. One of the ways in which this can be achieved is by forming an HUF, or a financial arrangement where a family is allowed to accumulate its funds together to avoid taxes. Finally, the quality of investment in the market today helps investors achieve long-term growth by making the market increasingly friendly to it.
How an HUF Can Help Save Taxes?
A Hindu Undivided Family (HUF) is a unique entity that helps in reducing tax liabilities by creating separate tax identities for families. A HUF has its own Permanent Account Number and files taxes independently of the members. To form a HUF, a married couple with at least one child can pool their assets. It is most commonly used by Hindus, Buddhists, Jains, and Sikhs, who are eligible to open such accounts.
By opening a HUF, a family can avail of all tax exemptions available to an individual. For instance, the new tax regime allows a HUF to claim the basic exemption limit of Rs.3 lakh and the deductions under Section 80C of up to Rs.1.5 lakh. This is the strategy to save tax by forming a completely different individual with a PAN card, where the entire family can decrease the amount of taxable income.
Let’s understand this with an example of case:
Consider a case of a couple wherein one of them earns Rs.10 lakh per year and the other, Rs.15 lakh per year, respectively. Both invested in mutual funds, which generated capital gains of Rs.7.5 lakh each (in total Rs.15 Lakh). If booked in the names of these two individuals, the tax payable would be pretty high. However, shifting the inherited corpus to a HUF and investing in mutual funds from this account would treat the HUF like a separate individual. Since the income of the HUF is less than the Rs.3 lakh income tax-free limit, the tax payable would be lower, saving around Rs.55,000.
It is worth mentioning that the assets transferred to the HUF account are not always easy to achieve. Assets need to be inherited or passed on through a will or ancestral inheritance. It takes time, and planning to create an HUF corpus.
Process of Creating an HUF Account
However, it is a physical process to open an HUF account and invest in mutual funds. So, a HUF has to undergo the KYC process, which is available in Point of Service (POS) centers associated with mutual fund platforms. Upon this completion, the online investment starts similar to any other investor.
However, whereas it is relatively easy to create an HUF, its dissolution can be a complex procedure. For the dissolution to be upheld, a formal order must be passed and partial partitions are not recognized under Indian tax law. Thus, any tax planning through a HUF should ideally be long-term in nature.
Significance of Quality-Driven Investment Strategies
Apart from tax planning, quality-focused investment strategies in the current market can help investors. Quality-focused investment strategies have outperformed value stocks over the long term. Companies that demonstrate durable business models, competitive advantages, and strong financial health are likely to provide stable returns, especially during periods of market volatility.
An analysis of the past 20 years shows that quality indices, such as the Nifty 200 Quality 30 and the Nifty Midcap 150 Quality Index, have outperformed their parent indices most of the time. In particular, quality stocks in mid and small-cap segments have shown superior performance, with indices like the Nifty Midcap 150 Quality 50 outperforming its parent index 85% of the time. This brings out the fact that quality investing is a reliable strategy for long-term growth, especially in volatile markets.
While some value-focused sectors like PSU banks have seen great returns, quality stocks from sectors such as NBFCs, consumer goods, and auto companies have shown resilience and growth potential. For investors seeking high growth opportunities amidst the evolving economy in India, investments in quality-focused funds should cater to sectors shaping India’s future.
A HUF can be an effective mechanism for generating tax optimization while maximizing investment benefits, and it is used as a tool for mutual fund investments. Families can create a separate tax entity using HUF to avail exemptions and deductions available for individual taxpayers. However, creating and dissolving a HUF requires a long-term perspective since these processes involve some complexity.
In parallel, the focus on quality-driven investment strategies is the most effective way to achieve superior returns over time. Investors can invest in companies with strong fundamentals and growth potential to ride out market volatility and position themselves for future gains. Quality-focused funds, particularly those that target high-growth sectors, offer a promising opportunity for investors looking to build wealth in India’s expanding economy.
