Income Tax Impact on Gift to HUF & Gift by HUF


Income Tax Impact on Gift to HUF & Gift by HUF

Hindu Undivided Family (HUF) is a separate taxable entity under the Income Tax Act-1961. It can be used as a legal tax planning tool. However, HUF need a corpus for earning income or making investment.

One of the ways to have the corpus of Hindu undivided family can be by receiving the gifts from relatives.

Though, there is no restriction for a HUF to accept gifts from any source. However, there are three sections which one need to read before finalizing any tax planning. This three sections are Section-64(2), Section-56(2)(X) and Section-10(2) of Income Tax Act,1961.

Gift receipt by HUF:

Any individual / HUF receiving gift from any person exceeding Rs. 50,000/- is taxable in the hands of the recipient pursuant to section 56(2)(x). However, it is not taxable if the gift is received from the “Relative”. As per Section 56(2)(X) of Income Tax Act,1961, only members are the “Relative” of HUF and so gifts received from members shall be exempt in hands of HUF. Any gift received by HUF from person other than members is liable for taxation in the hands of the HUF if aggregate amount exceeds Rs. 50,000/-.

However, if the individual member of the HUF gives the gift to HUF then it is referred to as the “Individual throwing his individual property” to the common hotpotch. In this case, one needs to know about section 64(2) of the Income-tax Act, 1956.

Section 64(2) is a clubbing provision which provides that income generated from such property as is gifted by member to the HUF would be assessable as his individual income only and not as HUF income.

However, the income so generated will remain the income of HUF only and HUF is free to invest this income. The clubbing provision is applicable only to first generation of income and any income generated out of such reinvested income is not liable for clubbing and remains with the HUF.

In short, even if the initial income is clubbed in the hands of the member gifting the amount, still it would be tax beneficial as future years income on “such income” is not to be clubbed with the income of the members.

Gift given by HUF to Member:

First of all, Hindu Law doesn’t expressly permit the gift of amount of HUF to its members except in certain special cases and that too of reasonable amount for pious purposes.

From income tax perspective, whether the member will be liable for taxation if the gift form HUF exceeds Rs. 50,000/-.

It may be noted that “HUF” has not expressly defined in the definition of “Relative” under Income Tax Act, 1961.  It may be noted that the definition of a “Relative in case of HUF” has been given as “any member of the HUF” by Finance Act- 2012. Without specific mention of HUF as relative of Individual, it will be difficult to say that gift received by Member from HUF will not be taxable under Section 56(2)(x).

In short, gift received by individual HUF members in excess of specified aggregate limits of Rs. 50,000/- from the HUF shall be chargeable to tax in the hands of individual members.

There are judicial ruling on either side. In one case, it  has been held that such gifts should be tax-free for individual members as HUF is a group of relatives only and not anything else. To adopt the view that gifts received by an individual HUF member from the HUF is tax-free may be debatable & will be full of litigation.

In my view, amount received by member from HUF should not be governed by section-56(2)(X) as each member of the HUF has pre-existing right in the assets of the HUF and so  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. Chandigarh ITAT in Pankil Garg Vs PCIT (ITAT Chandigarh) has also held that the provision of section 56 (2)(vii) of the Income-tax Act, 1961 does not apply to a gift given by a Hindu Undivided Family (HUF) to its members for the reason that that a member has pre-existing right in the family properties.

Further, amount received by members from HUF shall be exempt under section-10(2) if the following two conditions are fulfilled:

  1. Individual is the member of an HUF and
  2. Amount is received is from the income of the HUF.

To be on a safer side, I would suggest that HUF should not give the amount to the member. Rather, HUF can give interest-free loans to its members if it can be established as a genuine transaction.