Income tax

Income tax on initial donation to HUF

My CA says that for the initial contribution to my newly formed HUF, I can take any amount of money from my father as a gift and also claims that there is absolutely no tax liability on such a gift transaction for the first time. Subsequent donations received would be taxed according to his opinion. I understand this is wrong and I have to pay taxes if the total HUF income including these gifts exceeds 2.5 lakhs. Please enlighten me if my CA or I are correct.

Answer: After the abolition of the Gift Tax Act, where the donor was required to pay tax on the amount of donations made during the year, the government then introduced a provision in the law on income tax under which the recipient of the donation is liable to pay tax on the donations received by him if the aggregate of the donations received by him during the year exceeded the threshold of fifty thousand rupees . However, gifts received from certain specified relatives are not covered by this provision which treats gifts as income of the individual recipient.

With respect to gifts received by a HUF, its members should be treated as its relatives and therefore gifts received by the HUF from its members should not be taxed in its hands without any threshold. Although not taxed in the hands of the HUF, the income from the donated asset must be associated with the income of the person making the donation. The karta, his wife and all family members be it son, daughter, daughter-in-law and children and their wives up to the 4th generation are treated as his HUF members. Karta’s father should not be treated as a HUF relative, so any gifts received from your father by your HUF will be treated as income in the hands of your HUF if the total gifts received by your HUF exceeded fifty thousand in a year . Income tax law does not distinguish between the initial donation to HUF and subsequent donations and therefore any gifts received from your father would be subject to tax if the total value of the gifts exceeds the threshold of fifty thousand rupees per year. Your CA is therefore wrong and your understanding of the law is correct.

Balwant Jain is a tax and investment expert and can be contacted at [email protected] and @jainbalwant on Twitter.

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