Are gifts from your father and father-in-law to your HUF tax-free? Here is what I-T law says

HUF Tax Laws

Managing taxes around gifts and Hindu undivided families (HUFs) can get confusing. In today’s Ask Wallet-Wise query, we answer whether money gifted by close relatives like a father or father-in-law is taxable.

Moneycontrol’s Ask Wallet Wise initiative offers expert advice on matters of personal finance and money. You can email your queries to askwalletwise@nw18.com and we will try and get a top financial expert to address your queries.

I started my HUF last year with Rs 5 lakhs gifted by my father, the karta of the HUF. Do I need to report this as income in my income tax return (ITR) or is it tax exempt? What is the position on money gifted by the father-in-law of the karta? What happens if these gifts are not reported in the ITR being filed now?

Expert advice: As per Section 56(2)(x) of the Income Tax Act, if the aggregate value of all gifts received by a person in a year exceeds Rs 50,000, the entire value of such gifts is treated as income of the recipient and is taxed at the applicable slab rate. If the total value of gifts received in a year does not exceed Rs 50,000, they are not taxable.

However, there are exceptions. Gifts received from specified relatives of an individual or HUF are not taxable, regardless of the amount. In the case of an HUF, all members are treated as relatives. Therefore, any gift received from a member is not taxable for the HUF but clubbing provisions apply — meaning income earned from such a gift will be taxed in the hands of the member who gave the gift.

Importantly, lineal descendants of a common ancestor are members of the HUF. Spouses of lineal descendants are also members.  HUF would consist of Karta, spouse, and any children born to them. Father or father-in-law cannot be added as members, because they do not fall within the line of descendants.

Considering your father as well as your father-in-law are not members of your HUF, so gifts received from them are treated as taxable income of the HUF in the year of receipt. If such gifts are not reported in the ITR, a penalty of 200 percent of the tax due can be levied in addition to the regular tax and interest.

It is advisable to file the HUF’s ITR under the new tax regime to benefit from lower tax rates, remain fully compliant, and avoid any unpleasant consequences.

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