Explained: Income tax implications for money transferred by Karta of a Hindu Undivided Family to his HUF

If Karta of a HUF transfers money from his account to the HUF account. How is it to be treated? What happens to the income the HUF earns out of it?

The money transferred by the Karta of the HUF may be treated as a loan if the same is intended to be repaid. It can be treated as a gift if the money is not intended to be repaid. As per Section 56(2), any gift received from specified relatives is tax-free in the hands of the recipient.

A member of the HUF is treated as a relative of the HUF; hence, there is no tax implication when receiving money from the HUF. However, due to the applicability of clubbing provisions, income earned by the HUF on the money gifted by its Karta will be treated as Karta’s income and added to his income year after year.

The clubbing provisions will apply until the HUF’s assets are fully partitioned. Please note that only the income from the transferred asset will be subject to the clubbing provision, not the income earned on the investments made with the asset already clubbed.

If the money is treated as an interest-free loan, the assessing officer is likely to apply the clubbing by invoking the provisions of Section 60 for transferring income without transferring the asset because giving interest-free loans may be treated as transferring income without transferring the asset.

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on social media platform X (formerly Twitter)