Synopsis

Money or property gifted by a member to an HUF may not be taxable in the HUF’s hands because of the “relative” exemption. But the tax consequence for income generated from such property is different. This article explains why transferring self-acquired assets to an HUF does not provide the intended tax-saving benefit.

A Hindu Undivided Family (HUF) is recognised as a separate taxable person under the Income-tax Act, 1961 (“the Old Act”),applicable up to Assessment Year 2026–27, and also under the Income-tax Act, 2025 (“the New Act”), which came into force on 1 April 2026.



As a separate taxable person, an HUF can have its own taxable income and is entitled to the applicable basic exemption limit and slab rates. Under the new tax regime for Tax Year 2026–27, total income up to ₹4 lakh is subject to nil tax, followed by concessional slab rates at higher income levels.



This may lead to a seemingly simple tax-planning idea: why not transfer one’s personal savings to an HUF of which one is a member, allow the HUF to invest those funds, and have the resulting income taxed separately in the hands of the HUF?

The idea may appear even more attractive because money or property received by an HUF from its members qualifies for the “relative” exemption under the provisions dealing with receipt of money or property without consideration.



Also read: Gifted a house to your spouse? You may still have to pay tax on the rental income: Know 7 key things before filing ITR for AY 2026-27

But the “relative” exemption can be misleading

Under Section 92(2)(m) of the New Act, corresponding to Section 56(2)(x) of the Old Act, receipt of money or property without consideration, subject to the conditions and monetary threshold of ₹50,000 can be taxable in the hands of the recipient as income from other sources.



However, an important exception applies where the receipt is from any “specified relative”.



In the case of an HUF, under these provisions any member of the HUF is treated as a specified relative. Consequently, where a member gives money or property to the HUF without consideration, the receipt falls within the “relative” exemption and, accordingly, is not taxable in the hands of the HUF.



This answers one question:



“Is money or property received by an HUF from its member without consideration taxable in the hands of the HUF?”



The answer is no, because the member is treated as a “ specified relative” of the HUF for this purpose.



But this does not answer a more important question:



“Who will be taxed on the income subsequently generated from that money or property, the HUF or the individual who transferred it?”



The answer lies in section 99 of the New Act, corresponding to section 64 of the Old Act.

Section 99 changes the tax equation

Section 99(3) of the New Act, corresponding to section 64(2) of the Old Act, specifically deals with a situation where property owned by an individual is converted into property belonging to an HUF of which that individual is a member.



These provisions cover such conversion without consideration through:

• impressing the individual’s self-acquired property with the character of property belonging to the HUF;
• throwing such property into the common stock of the family; or
• transferring the property, directly or indirectly, to the HUF.

Importantly, Section 99(3) operates “irrespective of any other provision of this Act or any other law in force” for computing the total income of the individual. Thus, the exemption available when the HUF receives money or property from a member and the clubbing rule applicable to income subsequently generated from that property operate at two different stages.



The tax consequence is clear: under Section 99(3), the income derived from such property, or any part thereof, is deemed to be the income of the individual who transferred or converted the property.



Accordingly, such income is required to be included in the total income of the individual. Merely including the income in the return of the HUF does not alter the tax consequence prescribed by the clubbing provision.

Rs 50 lakh gift to HUF: Can it really save Rs 1.37 lakh tax every year?

Consider this example.



Mr A has Rs 50 lakh of his own savings, accumulated from salary and his other sources of income. His total income already places him in the 30% tax slab, and he is also subject to 10% surcharge and 4% health and education cess.



Suppose Mr A invests the Rs 50 lakh himself in a fixed deposit earning 8% per annum. He would earn annual interest of Rs 4.00 lakh, which would form part of his taxable income.



He therefore considers another route.



He transfers the Rs 50 lakh to HUF of which he is a member. The HUF has no other taxable income. The HUF then invests the Rs 50 lakh in 8 % fixed deposit and earns Rs 4 lakh as interest.



The apparent tax planning looks attractive:



Rs 50 lakh gifted to HUF → no tax on receipt → HUF earns Rs 4.00 lakh interest annually → income remains within the applicable basic exemption limit → no tax payable by the HUF.



Compared with Mr A paying tax on the same Rs 4 lakh at his applicable tax rate, the apparent annual tax saving could be around Rs 1.37 lakh.



Also read: Gifts to daughter-in-law are tax-free, but parents-in-law pay tax on income; Why Budget 2026 should fix this anomaly

But does the law permit this result?

No.



Since the Rs 50 lakh represents Mr A’s self-owned funds transferred to the HUF without consideration, Section 99(3) of the New Act, corresponding to Section 64(2) of the Old Act, comes into operation. The Rs 4 lakh interest derived from the transferred funds is deemed to be the income of Mr A and is required to be included in his total income and not in the total income of the HUF.



The apparent annual tax saving of around Rs 1.37 lakh therefore does not translate into an actual tax saving.

Before gifting money to your HUF, check the clubbing rule

The misconception arises because two different provisions are sometimes read in isolation.



A taxpayer may correctly conclude that money or property received by an HUF from its member is not taxable in the HUF’s hands because of the applicable “relative” exemption. But it does not follow that income subsequently generated from the transferred money or property will also be taxable separately in the hands of the HUF.



Therefore, before transferring personal funds, investments or other assets to an HUF with the expectation that the income generated from them will be taxed in the hands of the HUF, taxpayers should ask one important question:



“Does Section 99 of the New Act require the income generated from that property to be clubbed in his hands?”

Already gifted money to your HUF? Review your earlier ITRs

The issue is relevant not only for taxpayers transferring, or planning to transfer, money or property to an HUF in Tax Year 2026–27, but also for those who may have adopted an incorrect tax treatment in AY 2026–27 or earlier years under this misconception.



Taxpayers who have already transferred their self-acquired money, investments or other property to an HUF but have not included the income generated from such money or property in their own return for AY 2026–27 may consider correcting the tax treatment by filing a revised return under section 139(5) of the Old Act within the applicable statutory time limit.



For preceding assessment years, taxpayers may consider filing an updated return under section 139(8A) of the Old Act, subject to the prescribed conditions and restrictions. An updated return can be furnished within 48 months from the end of the relevant assessment year, with payment of the applicable tax, interest and additional income-tax under section 140B.

Updated return: How delay increases the additional tax

Therefore, delaying the correction can materially increase the tax cost. The additional income tax is not merely a percentage of the omitted income or even of the basic tax; it is calculated at the applicable percentage of the aggregate of tax and interest payable on the updated return. For this purpose, tax includes applicable surcharge and cess.

The bottom line: A tax-free gift does not mean tax-free income

The message from Section 99(3) of the New Act and Section 64(2) of the Old Act is clear: HUF may be a separate taxable person, but transferring your self-acquired money or property to the HUF does not shift the tax liability on income generated from that property. The exemption available when an HUF receives a gift from its member and the clubbing provisions applicable to income subsequently generated from the transferred property operate at two different stages and must be read together.



Taxpayers should therefore ensure that income required to be clubbed is correctly reported in their own return. Failure to do so may result in additional tax and consequential interest and may also attract penalty provisions. Where such under-reporting falls within the statutory category of “misreporting of income”, the penalty can be 200% of the tax payable on the under-reported income, apart from other consequences under the applicable provisions of the Income-tax Act.



The author, O.P. Yadav, is a former IRS officer with over 36 years of experience in tax administration, education, and training. He is presently associated with Prosperr.io as Tax Evangelist. The views expressed are personal.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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