Can you save tax by giving shares to your HUF??

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A Hindu Undivided Family (HUF) is a separate legal entity under the Income Tax Act that can own and earn income independent of its members. It's a common structure used by Indian families to manage inheritance property and coordinate taxes better. But when individual members transfer portions to the HUF, tax treatment of such transfers—and any profit made from them—must abide by certain rules and regulations.

Gift tax is not levied on transfers to HUF

Where any member donates the HUF shares without monetary consideration, such a donation is not taxable under Section 56(2) of the Income Tax Act as a rule. The reason behind this is that gifts made by members to HUF are exempted, just like gifts made by HUF to its members. Hence, HUF can receive shares donated by its members without triggering gift tax provisions.

No tax benefit on combined income from transferred shares

Although the transfer of shares to an HUF is tax-exempt, the income that could be derived from such shares—such as dividends or capital gains—could fail to have independent taxation in some cases. As per Section 64(2) of the Income Tax Act, any income generated out of assets transferred by a member to the HUF (for inadequate consideration) will be treated as part of the individual member's income. This is against the concept of income splitting for tax advantage.

When are tax benefits possible?

Tax benefits are possible if the HUF purchases shares as ancestral property, or by inheritance or will. In these cases, the income thus earned on these shares is taxed in the hands of the HUF and not aggregated with the member's income. The catch is that the asset may not be voluntarily transferred by a member during his lifetime without consideration. Accurate planning in the context of succession and inheritance can avoid erosion of the individual tax identity of the HUF.

Tax planning using HUF needs a cautious strategy

Transfer of shares to an HUF is a tax-saving strategy that may sound wonderful, but if it does not come under inheritance or ancestral provisions, the sale proceeds of the shares could be taxed in the hands of the original shareholder. Members should consult a tax advisor to take advantage of the HUF structure effectively.