HUF receiving a Gift of more than Rs.50,000 in a Tax Trap?

Query: On the birth of my son in April, 2011, my father has gifted an amount of Rs.2,70,000 to my HUF.  I have acknowledged the receipt of the said gift as Karta on behalf of my HUF.  I believe that this being a gift received from ‘relative’ is not taxable as income of my HUF, although the same exceeds the monetary limit of Rs.50,000 specified for exempt gifts.  Kindly advise whether my view is correct.

 

Reply: You have unfortunately fallen in the tax trap for gifts, by receiving more than Rs.50,000 as a gift in the case of your HUF.  The definition of the term ‘relative’, as given under Section 56(2)(vi) of the I.T. Act being the relevant provision in the above regard, lists various relations only with reference to an ‘individual’.  Since the recipient of the gifted amount is your HUF and the law does not contemplate any ‘relative’ in respect of an HUF, although the gift is received from your father, the same will not fall under the exemption provided.  The entire amount of Rs.2,70,000 would be required to be declared as your HUF’s taxable income for the current financial year.

You can, however, plan to play smart by legally avoiding the tax liability in the case of your HUF, through the following strategy:

  • Invest Rs.1,00,000 out of the amount of Rs.2,70,000 received in any savings eligible for deduction under Section 80C (such as PPF, LIP etc.).  Since the amount of investment would be made out of the gift received, which represents your HUF’s ‘income chargeable to tax’ under section 56(2)(vi), there should be no legal bar in claiming the full deduction of Rs.1 lakh under Section 80C.
  • As regards the balance amount of Rs.1,70,000 the same can also be claimed as exempt, being within the Rs.1,80,000 income-tax exemption limit as applicable for FY 2011-12.

 


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