Since members including the daughter–in-law are specified relatives of the HUF, the HUF will not have any tax liability in respect of the rental income so received
Question: One of my daughter-in-law has bought a residential flat in Mumbai which has been let out on monthly rent of 50,000/-. She voluntarily wishes to contribute the rental income directly to my HUF to enhance its corpus. I want to know whether it is perfectly legal or not. Will it make any difference if if she transfers the house to the HUF instead of the rental income?
Answer: This is the case of transfer of income without transfer of the asset. As per the provisions of Section 60 of Income Tax Act where any income is transferred without transferring the asset, such income shall be included in the hands of the owner of such asset. Therefore, the rental income shall remain taxable in the hand of your daughter in law. The rental income so transferred will be treated as gifts from her to the HUF. As per the income tax laws any gift received from specified relatives is exempt under Section 56(2) in the hands of the recipient. Since members including the daughter–in-law are specified relatives of the HUF, the HUF will not have any tax liability in respect of the rental income so received.
It is not only the income transferred which will be included in the hands of the daughter-in-law but also the income arising from investments made out of the rent transferred shall also be clubbed with the income of your daughter in law because the rental income is nothing but gift of an asset from your daughter-in-law to the HUF. There would not be any change in tax implications even if she transfers the house to the HUF as the clubbing provisions will still apply in respect of the rent received by the HUF on such property. However the income earned on reinvestment of the rental income will be taxed in the hands of the HUF and not daughter as the clubbing provisions apply to the income on the asset transferred and not on income on income from the asset transferred.
Balwant Jain is a tax and investment expert and can be reached on firstname.lastname@example.org