INTRODUCTION: In the previous article on HUF, we had discussed about the meaning of HUF, its formation, creation of corpus of HUF and how it can be used as a legal tax saving tool. In one of the ways the corpus of Hindu undivided family can be created by receiving gifts from relatives. It is one of the most sought-after routes taken by HUF members in India to create wealth and add impetus to the existing capital. There is no stipulation for a HUF to accept gifts from any source. The only thing to be taken into consideration is that the intent of the donor should be clear and the gift should be Bonafide. Gift declaration detailing complete information relating to the donor should be recorded and preserved to support any unforeseen litigation. Let’s understand the implications in gifts to and from HUF.
The entire article shall be governed by the provisions involved in Section-64(2), Section-56(2)(X) and Section-10(2) of Income Tax Act,1961.
Firstly, let’s discuss tax implications involved in GIFTS TO HUF:
RELATIVES OF HUF: In case of HUF, members are its relative. So as per provisions of Section 56(2)(X) of Income Tax Act,1961, gifts received from members shall be exempt in hands of HUF.
TAX IMPLICATION ON DONOR: Taxation of any amount given by the donor i.e., any gift given by the donor is not taxable in the hands of donor and is specifically not regarded as transfer under Section 47 of the Act. So, any amount given/ asset transferred by the donor without any consideration is not taxable in the hands of donor.
However, it is not possible for an individual being a member (Relative of HUF) of HUF to convert his separate property into property belonging to HUF in view of the clubbing provisions contained in Section 64(2) of the Income-tax Act, 1956. In such a case, the income generated from such property would be assessable as his individual income only and not as HUF income. However, the income which is so generated remains with the HUF and HUF is free to invest this income and any income generated out of such reinvested income is not liable for clubbing and remains with the HUF. Thus, though the initial income is clubbed in the hands of the person who has given the gift, income from income in future years is not to be clubbed.
Following gifts received by HUF shall be taxable if received from non-relative:
- Money received in aggregate in excess of Rs50,000 in a financial year
- Immovable property received, where stamp duty value exceeds Rs 50,000.
- Movable property received, where aggregate fair market value exceeds Rs 50,000.
Movable property means shares/securities, jewelry, archaeological collections, drawings, paintings, sculptures or any work of art and bullion, being capital asset of the taxpayer.
Let’s understand all this with the help of example:
Illustration: Piyush Gupta and sons HUF receives land having SDV 5 lacs from his Karta (Mr. Piyush) and cash amounting to Rs 1 lacs and a car from Piyush’s friend as gift on his wedding anniversary. The land will be used by HUF to earn rental income. What would be the tax implications?
Both the transactions by Mr. Piyush and his friend will not be regarded as transfer under Section 47, Income tax act,1961 and hence not attract any capital gain tax in hands of donor. In hands of his HUF the SDV of land although exceeds 50,000, still shall not be taxable in the hands of HUF since it is received from member. However, the rental income from HUF shall be exempt since the land is received from Karta (relative of HUF). However, such rental income shall be clubbed in the income of Mr. Piyush as per the provisions of Section-64(2) of Income Tax Act,1961.
Cash received by HUF from non-relatives (Piyush’s friend) amounting to Rs 1 lacs exceeds the limit of monetary gift that can be received by HUF under section-56(2)(X). Hence, Rs 1 lacs shall be taxable in the hands of HUF. Car is not a movable property as defined under SEction-56(2)(x). Therefore, FMV shall not be taxable in hands of HUF.
Now Let’s discuss tax implications involved in GIFTS FROM HUF:
This thing has been under a lot of debate since in case of individual, because HUF has not expressly defined in the definition of relative under Income Tax Act,1961 although the definition of a relative in case of HUF has been extended to include any member of the HUF by way of an explanation in Budget 2012.
In hands of non-members any amount received in excess of Section 56(2)(x) as stated above are taxable.
In the context of an individual as a recipient of gift, the definition of donor relative does not include an HUF. Hence, on plain reading of law, it appears that the gift received by individual HUF members (in excess of specified limits) from the HUF shall be chargeable to tax in the hands of individual members. This has also been upheld in a few judicial rulings. However, certain contradictory rulings have held that such gifts should be tax-free for individual members, as HUF is a group of relatives. Hence, adopting this position that gifts received by an individual HUF member from the HUF is tax-free may be litigious.
The amount received by member from HUF shall not be governed by section-56(2)(X). Each member of the HUF has pre-existing right in the assets of the HUF, and therefore, receipt of any sum from the HUF cannot be said to be a gift without consideration by the HUF or gift by other members of the HUF. Thus, amount received by members from HUF shall be exempt under section-10(2) if two conditions are fulfilled: 1) the individual is the member of an HUF and (2) the sum received is from the income of the HUF. However, when a member converts his individual property as HUF property, it cannot be said to be exempt as other members don’t have a pre-existing right in the individual member’s property and clubbing provisions under section-64(2) shall apply.
Recently the Chandigarh bench of the Income-tax Appellate Tribunal in case of Pankil Garg Vs PCIT (ITAT Chandigarh) held that the provision of section 56 (2)(vii) of the Income-tax Act, 1961 (the Act) does not apply to a gift given by a Hindu Undivided Family (HUF) to its members, on the premise that a member has pre-existing right in the family properties.
CONCLUSION: There should be no tax implications on the drawing of interest-free loans by you from the HUF, provided it can be established as a genuine transaction. In any case, be mindful that such transactions between relatives may be scrutinized by authorities from a tax avoidance perspective, hence adequate documentation should be maintained to establish their genuineness. Although there aren’t any restrictions on HUF to accept gifts, however in order to ensure the veracity of transactions the gifts given should be Bonafide and the donor’s nature and source should be identifiable and taxed priorly otherwise it may lead to unexplained credit under Section-68 Income tax Act,1961 and lead to tax liability on such credit u/s 115BBE at tax rate of 60% which will be further increased by 25% surcharge, 6% penalty, i.e., the final tax rate comes out to be 83.25% (including cess).
For queries or any guidance mail us at supriya@guptapiyush.com.
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A very good article on HUF and its taxation of income u/s 64(2)
However still elaborate clarification is required on the taxability and status of the income to be earned on the assets received on partion of HUF
when Karta dies and huf is dissolved.
whether it will be individual or huf status of the assets received by the coparcener