Can daughter-in-law transfer rental income to HUF legally without tax implications?

After a decade in limbo, Jaypee homebuyers finally see possession on the horizon

• Rental income transferred to HUF is taxed in the daughter-in-law's hands.
• Gifts from daughter-in-law to HUF are exempt from tax for the HUF.
• Income from reinvestment of rental income is taxed in the HUF's hands.

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Wondering if your daughter-in-law can contribute rental income to the Hindu Unified Family (HUF)? Today’s Ask Wise Wallet explains how income from reinvestment is taxed in the HUF.

My daughter-in-law owns a residential property that earns a monthly rent of Rs 50,000. She wants to transfer this rental income directly to my HUF to build its corpus. Is this legally permissible? Also, would the tax or legal implications differ if she transfers the property itself to the HUF instead of only the rental income?

Expert’s Advice: This is the case of transfer of income without transfer of the asset. As per the provisions of Section 60 of the Income Tax Act, where any income is transferred without transferring the asset, such income shall be clubbed in the hands of the owner of such asset. Therefore, the rental income shall continue to be taxed in the hands of your daughter-in-law.

The rental income directly received by the HUF will be treated as gifts from her to the HUF. As per the income tax laws, any gift received from specified relatives is exempt under Section 56(2) in the hands of the recipient.  Members, including the daughter–in–law, are covered in the definition of specified relatives as far as an HUF is concerned. So the HUF will not have any tax liability in respect of the rental income so received.

It is not only the income so transferred which will be subject matter of clubbing, but also the income arising from investments made out of the rent so transferred, which shall also be clubbed with the income of your daughter-in-law, because the rental income is nothing but a gift of an asset from your daughter-in-law to the HUF.

There would not be any change in tax implications even if she transfers the house to the HUF, as the clubbing provisions will still apply in respect of the rent received by the HUF on such property. The capital gains on the sale of the house, as and when it is sold, will also be clubbed in the hands of the daughter-in-law.

However, the income earned on the reinvestment of the rental income will be taxed in the hands of the HUF and not the daughter-in-law, as the clubbing provisions apply to the income on the asset transferred and not on income on income already clubbed and invested.