Capital Gain & Trading Income under HUF vs Individual – Tax Treatment for FY 2024–25 / AY 2025–26
Introduction
As taxpayers explore better ways to optimize taxes, the creation of a Hindu Undivided Family (HUF) becomes a key tool in tax planning. One of the most common questions is:
“Can I reduce tax on capital gains or trading income by using an HUF instead of my individual PAN?”
The answer involves an understanding of income classification, turnover rules, audit applicability, and how the Income Tax Act, 1961 treats HUFs as a separate legal entity.
What is an HUF?
An HUF (Hindu Undivided Family) is a distinct taxable person under the Income Tax Act. It comprises:
- A Karta (head of the family),
- Coparceners (usually sons, daughters),
- Other members (spouse, parents, etc.)
An HUF can earn income and file a separate return with its own PAN, bank account, Demat account, and claim deductions independently.
Tax Treatment of Capital Gains & Trading Income
The nature of income (capital gains or business income) depends on the frequency and intent behind the share transactions.
1. Investment-Based Trading (Delivery-Based Shares)
| Particular | Individual | HUF |
|---|---|---|
| Income Head | Capital Gains | Capital Gains |
| STCG (sold within 12 months) | Tax @ 15% (u/s 111A) | Same |
| LTCG (held >12 months) | Tax @ 10% on gains above ₹1,00,000 (u/s 112A) | Same |
| Exemption limit | ₹2.5 lakh + ₹1 lakh LTCG | ₹2.5 lakh + ₹1 lakh LTCG |
| Audit Required? | No | No |
➡ Best used for tax planning, as both individual and HUF get separate exemptions and deductions.
2. Intraday Equity Trading (Speculative Income)
| Particular | Individual | HUF |
|---|---|---|
| Income Head | Speculative Business Income | Same |
| Tax Rate | Slab rate (up to 30%) | Same |
| Deductible Expenses | Allowed | Allowed |
| Audit Applicability | Yes, if turnover > ₹1 crore (₹10 crore if cash receipts/payments <5%) | Same |
| Presumptive Tax u/s 44AD | Not applicable | Not applicable |
➡ Treated as a business, not capital gains. Audit becomes mandatory if turnover exceeds limits.
3. Futures & Options (F&O) Trading
| Particular | Individual | HUF |
|---|---|---|
| Income Head | Non-Speculative Business Income | Same |
| Tax Rate | Slab rate (up to 30%) | Same |
| Audit Requirement | If turnover exceeds ₹10 crore (or ₹1 crore if not fully digital) | Same |
| Presumptive Scheme (u/s 44AD)** | Yes, if turnover ≤ ₹2 crore and not a company/LLP | Yes, same conditions |
| Deductible Expenses | Brokerage, internet, rent, staff salary, etc. | Same |
➡ Presumptive Tax Scheme can reduce compliance if turnover is within limits.
Turnover Limit and Audit Rules (Updated FY 2024–25)
| Nature of Trading | Income Type | Turnover Calculation | Audit Limit |
|---|---|---|---|
| Intraday Equity | Speculative Business | Absolute profit/loss (sum of positive/negative differences) | ₹1 crore (₹10 crore if 95%+ digital) |
| F&O / Derivatives | Non-Speculative Business | Absolute profit/loss + premium received | ₹1 crore (₹10 crore if 95%+ digital) |
| Delivery-based Equity | Capital Gains | Not relevant for audit | No audit required |
Strategic Tax Planning with HUF
Using an HUF gives the benefit of:
- A separate ₹2.5 lakh basic exemption
- Separate deductions under Sections 80C, 80D, 80TTA, etc.
- Dual portfolios for equity investment (Individual + HUF)
- Efficient use of capital gains exemption (₹1 lakh LTCG in both entities)
HUF is ideal for taxpayers with:
- High investment income
- Family-based property income
- A desire to reduce overall tax on capital gains and trading
Important Compliance for HUF Trading
1.HUF Deed: Mandatory to declare formation of HUF
2. PAN: Apply separately in the name of the HUF
3. Bank & Demat Account: Must be in HUF name
4. Funds Origin: Capital should come from ancestral assets or valid gifts (not from individual account)
5. Proper Documentation: Maintain books of accounts, expense proofs, etc.
Real-Life Example – Enhanced with Capital Gains & Tax Calculation
Let’s assume the total capital gains for FY 2024–25 are increased as follows (keeping the client’s original salary and other details similar):
| Nature of Income | Amount (₹) |
|---|---|
| Salary (same as before) | ₹18,86,501 |
| Short Term Capital Gains (STCG) | ₹3,50,000 |
| Long Term Capital Gains (LTCG) | ₹2,50,000 |
| Other Sources (Interest) | ₹58,304 |
Scenario A: All Income in Individual’s Name
Tax Calculation for Individual:
1. Salary Income: ₹18,86,501
2. STCG (u/s 111A): ₹3,50,000 → Flat 15%
3. LTCG (u/s 112A): ₹2,50,000
- Exemption: ₹1,00,000
- Taxable LTCG: ₹1,50,000 → 10%
4. Other Sources: ₹58,304
→ Gross Total Income: ₹25,44,805
Tax Computation (Old Regime):
| Component | Calculation | Tax (₹) |
|---|---|---|
| Salary + Other Sources (₹19,44,805) | Slab Rate | ₹3,26,725 (as before) |
| STCG (₹3,50,000) | @15% u/s 111A | ₹52,500 |
| LTCG (₹1,50,000) | @10% u/s 112A | ₹15,000 |
| Total Tax Before Cess | ₹3,94,225 | |
| Health & Education Cess @4% | ₹15,769 | |
| Total Tax Payable | ₹4,09,994 |
Scenario B: Split Income Between Individual & HUF
Suppose the following income is shifted to HUF:
- STCG of ₹1,50,000
- LTCG of ₹1,50,000
- Interest ₹10,000
Remaining income stays with individual:
- Salary: ₹18,86,501
- STCG: ₹2,00,000
- LTCG: ₹1,00,000
- Interest: ₹48,304
Individual’s Tax:
| Income Type | Amount | Tax |
|---|---|---|
| Salary + Other (₹19,34,805) | Slab | ₹3,26,725 |
| STCG ₹2,00,000 | @15% | ₹30,000 |
| LTCG ₹1,00,000 | Within Exemption | Nil |
| Total Tax Before Cess | ₹3,56,725 | |
| Cess @4% | ₹14,269 | |
| Total Tax (Individual) | ₹3,70,994 |
HUF’s Tax:
| Income Type | Amount | Tax |
|---|---|---|
| STCG ₹1,50,000 | @15% | ₹22,500 |
| LTCG ₹1,50,000 | ₹50,000 taxable after ₹1L exemption | ₹5,000 |
| Interest ₹10,000 | Exempt u/s 80TTA | Nil |
| Total Income: ₹3,10,000 | Less ₹2.5L Basic Exemption | ₹60,000 taxable |
| Tax on ₹60,000 (Slab) | @5% | ₹3,000 |
| STCG & LTCG | ₹27,500 | |
| Total Tax Before Cess | ₹30,500 | |
| Cess @4% | ₹1,220 | |
| Total Tax (HUF) | ₹31,720 |
Tax Comparison:
| Particular | Amount (₹) |
|---|---|
| Tax in Individual Case (A) | ₹4,09,994 |
| Tax with HUF Planning (B) | ₹3,70,994 + ₹31,720 = ₹4,02,714 |
| Tax Saved | ₹7,280 |
Conclusion:
By routing a portion of capital gains through the HUF, the taxpayer was able to:
- Utilize dual exemption slabs (₹2.5L × 2)
- Claim LTCG ₹1 lakh exemption in both entities
- Reduce the overall tax liability by ₹7,280
- Create long-term benefit for future investments and family assets
This benefit increases with larger capital gains or trading income.
Want to Get Started?
We can help you with:
- Drafting a proper HUF Deed
- PAN & Bank Account setup for HUF
- Investment resolution formats
- Tax planning for HUF & individual combination
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