Earnings tax on preliminary reward to HUF

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

Answer: After abolition of Gift Tax Act where the donor was required to pay tax on the amount of gifts made during the year, the government later on introduced a provision in the Income Tax Act under which the recipient of gift is required to pay tax on the gifts received by him if the aggregate of the gifts received by him during the year exceeded the threshold of fifty thousand rupees. However, gifts received from certain specified relatives are outside the scope of this provision treating gifts as income of the individual recipient. 

As far gifts received by an HUF is concerned its members are to be treated as its relative and thus gifts received by the HUF from its members is not to be taxed in its hands without any threshold limit. Though it is not to be taxed in the hands of the HUF but the income arising from the asset gifted is required to be clubbed with the income of the person making the gift. The karta, his spouse and all the members of the family whether son, daughter, daughter in law and children and their wives up to 4th generation are treated as its members of the HUF. Father of the Karta is not to be treated as relative of the HUF so any gift received from your father by your HUF will be treated as income in the hands of your HUF if aggregate of the gifts received by your HUF exceeded fifty thousand in a year. The income tax law does not differentiate between the initial gift to the HUF and subsequent gifts and therefore all the gifts received from your father would be subjected to tax in case aggregate value of gifts exceed the threshold of fifty thousand rupees in a year. So your CA is wrong and your understanding of the law is correct.

Balwant Jain is a tax and investment expert and can be reached on [email protected] and @jainbalwant on twitter.

Subscribe to Mint Newsletters

* Enter a valid email

* Thank you for subscribing to our newsletter.