Queries regarding Taxation of HUF

1. Clubbing Rules under Section 64(2) – Transfer of Personal Assets to HUF

• If a member transfers personal assets (like money) to the HUF, income earned from that transferred amount (capital gains, interest, or other income) will be clubbed with the income of the transferor.
• In your example, if Karta and members transfer ₹20 lakhs (not ancestral property) to the HUF, and the HUF invests it in mutual funds earning capital gains, the income from such investment will be clubbed with the transferor(s).
  
• This rule applies as long as the transferor(s) remain members of the HUF.

2. Future Gifts in the Form of Money – Applicability of Clubbing Rules

• Any future gifts in the form of money by a member to the HUF will also be subject to clubbing if the gifted amount generates income.
• However, if the money is received from a non-member as a gift or through inheritance, it will not attract clubbing provisions.
• 
  Note: Gifts to the HUF may also need to comply with Section 56(2)(x), which taxes gifts received by an HUF if they exceed ₹50,000 in aggregate during a financial year, unless received from a relative or on specific occasions like marriage.

3. Absence of a Gift Deed at the Time of Transfer

• Ideally, a gift deed should be executed at the time of transferring the money to the HUF, clearly stating the intention of the transfer as a gift. This helps establish legal and tax clarity.
• If no gift deed was created earlier, a sworn affidavit by the member can be created later to declare that the transfer was intended as a gift. While this is not as robust as a gift deed executed at the time of transfer, it can still serve as evidence of intention.
• Ensure the affidavit mentions:

  • Date of the transfer.
  • Amount transferred.
  • Declaration that the transfer was made as a gift to the HUF.
  • The relationship with the HUF (as a member).

4. How to Handle Daily Expenses of HUF Members

• Daily expenses of HUF members can be borne by the HUF itself, especially if the members rely on HUF funds for their sustenance. These expenses can be claimed as deductions from the HUF's income (as long as they are for the benefit of HUF members and not personal luxuries).
• If the HUF intends to transfer money to a member or the Karta for daily expenses, it should be:

  • Clearly documented as withdrawals for household expenses.
  • Not treated as salary or personal income, which would attract tax liability in the member's hands.

• Maintain proper accounting records to ensure that such transfers are reflected as "drawings for family expenses" in the HUF’s books.

Key Tax Planning Tips:

1. 
   Avoid direct transfers by members to HUF: Use ancestral property or gifts from non-members to fund the HUF.
2. 
   Maintain documentation: Ensure gift deeds or affidavits are executed for all transfers to the HUF.
3. 
   Segregate personal and HUF income: Clearly track the income earned by the HUF separately from personal income to avoid disputes.
4. 
   Plan for family expenses effectively: Use HUF funds directly or carefully document withdrawals to avoid tax complications.

1. Clubbing of Income:

   • Income from personal assets (e.g., ₹20 lakhs) transferred to HUF is clubbed with the transferor under Section 64(2), but reinvested income (e.g., mutual funds) is not clubbed.

2. Future Gifts:

   • Gifts from third parties are not clubbed, but gifts by members may trigger clubbing if income arises directly from the gifted amount.

3. Gift Deed or Affidavit:

   • If no gift deed was made, an affidavit can be created later to declare the transfer as a gift to the HUF.

4. Daily Expenses:

   • Use the HUF account for household expenses directly or make documented withdrawals for member use.

For detailed, personalized advice, consider a phone consultancy. Hope you find the information helpful. You are free to contact me for further discussion. If you could spare two minutes to write a review, it would be greatly appreciated. Thank you.

Shubham Goyal.

As per Sec. 64(2):

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.

Ans-1: No, the Capital Gains on Rs. 20 Lakhs accruing to HUF shall not be liable for addition of income in the hands of the transferor until and unless that Rs. 20 Lakhs were representing any sale proceeds from any property (moveable or immoveable).

Ans-2: Gift of "money" shall be liable for clubbing only when that "moneY" is covered under the defintion of "property" as per Explanation-1 above.

Ans-3: A Gift Deed or Affidavit are irrelevant to prove bona fide of any transaction. Mere transfer of money/ property/ asset without any/ proper consideration shall be in any case deemed to be a gift on the date of such transfer.

Ans-4: Daily expenses are never allowed as deduction to HUF or for that matter not even to any individual. Deductions are allowed for only business expenses for computation of income under PGBP or deductions are allowed as exemptions/ investments/ rebates, etc. as may be specifically allowed by any legislative document.