The conversion of self-acquired property into Hindu Undivided Family (HUF) property—commonly known as blending or impressing with HUF character—has long been recognised under Hindu law. However, from a taxation standpoint, such transactions are tightly regulated by specific anti-avoidance provisions under the Income-tax Act, 1961. This article briefly analyses the statutory framework under section 64(2), its practical implications, relevant judicial precedents, and the changing tax landscape in the post-DDT and post-Gift-tax era.
Concept of Blending under Hindu Law
Under Hindu law, a coparcener may voluntarily throw his self-acquired property into the common stock of the HUF, thereby abandoning his exclusive rights and allowing the property to be enjoyed by the family jointly. This act does not require any formal conveyance; intention is paramount. However, tax law does not merely follow personal law and has introduced deeming provisions to curb tax avoidance through such blending.
Statutory Framework: Section 64(2)
Section 64(2) of the Income-tax Act, 1961 provides that where an individual, being a member of an HUF, converts his separate property into HUF property (otherwise than for adequate consideration), he shall be deemed to have transferred such property to the members of the family.
Section 64(2) creates a statutory fiction whereby, although no transfer takes place in real or commercial terms, the act of converting or blending self-acquired property into HUF property is deemed to be an indirect transfer by the individual to the members of the HUF. As a corollary, the income arising from such converted property is not assessed in the hands of the HUF but is deemed to arise to the individual who effected the conversion. This deeming provision operates with continuity, inasmuch as even upon a partial or total partition of the HUF, the income from such converted property received by the spouse continues to be clubbed in the hands of the individual under section 64(1). For the purposes of these provisions, the expression “income” is of wide amplitude and includes loss, and the term “property” is expansively defined to cover movable or immovable property, the proceeds of sale thereof, any money or investment representing such proceeds, and even substituted or converted forms of the original property..
Scope and Limits of Clubbing – An Important Nuance
A critical but often misunderstood aspect of section 64(2) is that only the income from the originally blended asset is subject to clubbing. The income itself, once earned, belongs to the HUF.
A. Income from the original converted property → Clubbed in the individual’s hands
The most significant consequence of conversion or blending of self-acquired property into HUF property is that the income arising from the original converted asset does not escape taxation in the hands of the transferor. Section 64(2) of the Income-tax Act, 1961 incorporates a clear anti-avoidance rule by providing that, notwithstanding the property having acquired the character of HUF property under Hindu law, the income generated from such property shall be deemed to arise to the individual who effected the conversion and not to the HUF.
This deeming fiction operates irrespective of the manner in which the income is earned—whether by way of rent from immovable property, interest on deposits, dividends on shares, or any other accretion directly attributable to the original asset blended with the HUF. The underlying rationale is that a person should not be permitted to reduce or divert his tax liability merely by altering the legal character of ownership within the family unit without adequate consideration.
It is important to note that the clubbing is asset-specific and not entity-specific. While the asset itself legally belongs to the HUF after conversion, the tax law isolates the income stream arising from that specific asset and continues to fasten the tax liability on the individual transferor. This position remains unchanged even if the HUF treats the income as its own for accounting or investment purposes.
Further, the provision has enduring effect. Subsequent events such as partial or total partition of the HUF do not break the chain of clubbing, particularly where the income from such converted property is received by the spouse on partition, in which case section 64(1) becomes operative. The legislative intent is thus to ensure that the original act of conversion does not become a device for permanent tax avoidance through family restructuring.
In essence, income from the original converted property continues to be taxed in the individual’s hands throughout the life of the asset, reinforcing the principle that blending under Hindu law does not override the specific anti-avoidance provisions of the Income-tax Act.
Illustration
Mr. A, an individual and a member of his HUF, owns a self-acquired residential property. On 1 April 2024, he declares that the property is thrown into the common stock of the HUF and is thereafter treated as HUF property. During the financial year 2024-25, the property earns rental income of ₹3,60,000.
Although the property legally belongs to the HUF after conversion and the rent is received and accounted for by the HUF, the entire rental income of ₹3,60,000 shall be clubbed in the hands of Mr. A under section 64(2) and taxed as his individual income. The HUF will not be assessed on this rental income.
If, however, the HUF invests the rental income of ₹3,60,000 in fixed deposits and earns interest of ₹30,000 thereon in a subsequent year, such interest income will be taxable in the hands of the HUF, as it arises from the reinvestment of income and not directly from the original converted property.
This illustration clearly demonstrates that clubbing under section 64(2) is confined strictly to income from the original blended asset, and does not extend to income generated from subsequent utilisation or reinvestment of such income by the HUF.
B. Income generated from reinvestment of such income → Taxable in the hands of the HUF
While section 64(2) mandates clubbing of income arising directly from the original converted or blended property in the hands of the individual, its scope does not extend to income generated from the reinvestment or accretion of such income once it has come into existence. This distinction is of considerable practical importance and often misunderstood in application.
Once income arises from the converted property, that income—though clubbed in the individual’s hands for tax purposes—belongs to the HUF in law and in fact. The HUF is fully entitled to deploy, invest, accumulate, or utilise such income as its own. Any subsequent income that arises from such deployment or reinvestment is not traced back to the original converted property, but instead constitutes a fresh and independent source of income in the hands of the HUF.
In other words, the clubbing provision under section 64(2) is confined strictly to the “first layer” of income arising from the original asset converted by the individual. It does not create a cascading or perpetual clubbing effect. The moment the income is reinvested and begins to yield further income, the nexus with the original self-acquired property is broken for tax purposes, and such secondary income is assessable in the hands of the HUF as its own income.
This interpretation flows from the express language of section 64(2), which speaks only of “income derived from the converted property” and not of income derived from income. Courts and commentators have consistently recognised that extending clubbing beyond the first generation of income would amount to rewriting the statute and imposing an artificial and unintended tax burden.
Illustration
Mr. B blends his self-acquired fixed deposit of ₹10,00,000 into the HUF on 1 April 2023. During the financial year 2023–24, the fixed deposit earns interest of ₹80,000. In accordance with section 64(2), this interest of ₹80,000 is clubbed in the individual income of Mr. B, even though it is credited to the HUF’s bank account.
The HUF thereafter reinvests this interest income of ₹80,000 in mutual funds. During the financial year 2024–25, the mutual fund investment yields income of ₹12,000.
In this case:
- Interest of ₹80,000 earned on the original fixed deposit → Clubbed in Mr. B’s individual income
- Income of ₹12,000 earned from mutual funds (reinvestment of interest) → Taxable in the hands of the HUF
Thus, while the original income stream remains subject to clubbing, the income generated from reinvestment of such income is assessed independently in the hands of the HUF, reinforcing the principle that section 64(2) does not contemplate infinite or multi-layered clubbing of income. This distinction preserves the balance between anti-avoidance intent and legitimate family asset management under the HUF structure.
Gender Dimension: Who Can Blend?
Only a male coparcener can blend his self-acquired property with HUF property. A female member, even after the Hindu Succession (Amendment) Act, 2005, cannot blend her separate property into HUF property. She may, however, gift property to the HUF. This position has been authoritatively settled by the Supreme Court in Pushpa Devi v. CIT (1977) 109 ITR 730 (SC).
Gift-Tax Angle: Historical but Relevant
Under section 4(2) of the erstwhile Gift-tax Act, blending attracted gift tax to the extent of the shares of other coparceners. Though the Gift-tax Act has been abolished w.e.f. 1 October 1998, this historical context remains relevant for understanding older transactions and judicial reasoning. Currently, while gift tax is abolished, income-tax clubbing provisions continue to operate independently, making blending largely tax-neutral only in limited circumstances.
Shares, Bonus Issues and Judicial Guidance
From a tax-planning perspective, blending of shares has attracted considerable judicial attention. Where self-acquired shares are blended into HUF property:
- Dividend on original shares → clubbed in individual’s hands
- Bonus shares issued subsequently → treated as HUF property
The Madras High Court in CIT v. T. Saraswathi Achi (1982) 133 ITR 315 held that bonus shares arise from the HUF’s holding and not directly from the transferred asset, and hence belong to the HUF.
Contemporary Tax Position: Post-DDT Regime
The practical relevance of blending strategies has changed significantly in recent years:
- Dividend income is no longer exempt in shareholders’ hands (section 10(34) exemption withdrawn w.e.f. AY 2021-22).
- Dividends are now taxable at slab rates in the hands of recipients, subject to TDS under section 194.
- Consequently, the earlier advantage of dividend income being tax-neutral in the individual’s hands no longer exists.
Thus, blending of shares today does not offer meaningful dividend-related tax advantages, though capital structuring within HUFs may still have non-tax or succession-related relevance.
Hence, the conversion of self-acquired property into HUF property is legally permissible but tax-inefficient if undertaken solely for income shifting. Section 64(2) ensures that income from such converted property continues to be taxed in the hands of the transferor, thereby neutralising the intended benefit.
In the current tax environment—marked by abolition of gift tax, taxation of dividends at slab rates, and enhanced reporting—the decision to blend property should be guided more by family arrangement, succession planning, and asset management considerations rather than tax savings. Careful documentation, clear intention, and awareness of clubbing provisions remain essential to avoid unintended tax exposure.
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