Taxpayers, in an attempt to create the corpus of HUF, often gifts individual funds to HUF. The wrong presumptions is that

 

 

1. The income will be treated as the income of the HUF.
2. Income in the handa of the individuals making gift will be reduced and as a result their will be total tax benefit.

Let us understand the consequences in totality.

First, gifting the amount by individual member to the HUF (Technically, it is referred to as the throwing individual property in the common hotpotch) is not income of the “HUF” and the gift amount will not be treated as income of the HUF.

The definition of “Relative” as given in section 56 inckudes only member of HUF. It means that any receipt of money by HUF from any of its members will not have any income tax implications directly. If the gift is received  by HUF from any person other than members and if the amount exceed Rs. 50000/- then it will be taxable as “Income from Other Source” u/s 56 in the hands of the HUF.

In short, gift by member to HUF is totally tax free as far as the principal amount of gift is concerned. However, there is a clubbing provision which is applicable as far as subsequent income from the amount gifted is concerned. One must refer to section 64(2) which reads as under :

(2) Where, in the case of an individual being a member of a Hindu undivided family, any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration (the property so converted or transferred being hereinafter referred to as the converted property), then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computation of the total

income of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1971,—

 

(a)  the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly ;

(b)  the income derived from the converted property or any part thereof shall be deemed to arise to the individual and not to the family ;

(c) where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the income derived from such converted property as is received by the spouse on partition shall be deemed to arise to the spouse from assets transferred indirectly by the individual to the spouse and the provisions of sub-section (1) shall, so far as may be, apply accordingly :

 Provided that the income referred to in clause (b) or clause (c) shall, on being included in the total income of the individual, be excluded from the total income of the family or, as the case may be, the spouse of the individual.

 

Explanation1.  —For the purposes of sub-section (2),—

 

“property” includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method, such other property.

 Explanation 2.  —For the purposes of this section, “income” includes loss.

In short, all income accruing to HUF from the amount gifted to HUF will be treated as the income of the individual member only and will not be treated as income of the HUF. Diverting of income to HUF by making gift is not a effective tax planning tool in view of section 64(2) discussed above.

 

Though there is no direct benefit, Still gift could be useful to some extent as a tax planning tool from some other angel. I will cover about it in my next article.