Income tax implication of gift given by a member to own HUF

I am Karta of my HUF. In FY 2020 - 2021 I have invested my personal tax paid amount in my HUF account, which is generating interest income. What are the tax implications for me as well as for my HUF?- Anand Shah

The investment of individual member’s money in the name of HUF is generally treated as gift made unless the member intended it to be a loan. Since this transaction only took place last year, you have the options to treat it either way in case income tax return for you and your HUF are pending.

If you wish to treat this transaction as gift from you to your HUF, it has tax implications. As per the provisions of Section 56(2)(x), any gift received by a person is fully taxable in the hands of the recipient in case aggregate of all the gifts received during the year exceeds fifty thousand rupees. As long as the aggregate of the all the gifts does not exceed this threshold during one financial year, there is no tax implication on the gift amount.

However, gifts received on certain occasion as well as from certain specified relatives are not treated income in the hands of the recipient irrespective of the amount involved. In case of HUF all its members are covered within the definition of specified relative. so the amount gifted by you to your HUF is not treated as income in the hands of the HUF.

When the government gives by one hand, it generally takes back by another hand. As per provisions of Section 64(2) where any member gifts any asset to the HUF of which he is a member, the income arising from such gifted asset is required to be clubbed with the income of the member who has gifted such asset. So though the income from the investment will get credited in the books of accounts of the HUF, you will have to include such income in your hands year after year and even after the gifted asset changes it form.

Please note that the clubbing provisions will apply only in respect of the asset gifted and will not extend to the income generated from investment made out of the income generated from such asset. Even after assets of the HUF have been either partially or completely partitioned, the income in respect of share allotted to your wife will continue to be clubbed in your hand.

In order to avoid such perpetual complication, I would advise you to treat this transaction as loan to your HUF. Charge interest on this amount and take it back as and when you are comfortable. In order to avoid any litigation, I would advise you to charge interest at market rate.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant his Twitter handle.