Selling inherited shares through HUF? Watch out for these tax pitfalls

HUF Tax Rules

Many retirees use the HUF route to manage inherited assets and reduce tax liability. Today's Ask Wallet Wise query decodes mistakes in transferring shares and handling sale proceeds that can trigger clubbing provisions and unwanted scrutiny from the tax department.

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

Expert's Advice: First, there is no concept of “ancestral assets” in respect of property inherited after the enactment of the Hindu Succession Act, 1956. The shares inherited from your father are not ancestral property, they belong to you.

Crediting these shares to the demat account of your HUF is not legally correct. Such a transfer amounts to a gift made by you to the HUF. While this gift may be tax-exempt in the hands of the HUF, it attracts the clubbing provisions under the Income-tax Act. Consequently, the capital gains arising from the sale of these shares are required to be included in your personal income while filing your ITR.

Further, as stated by you, the HUF consists only of you and your wife. An HUF cannot come into existence without more than one coparcener, and a wife is not a coparcener. Unless there was an existing HUF asset prior to your marriage, an HUF cannot be formed merely upon marriage, it generally comes into existence upon the birth of a child.

In my view, your HUF may not be legally valid and could be questioned by the Income Tax Department. Even assuming that the HUF is validly constituted and the shares were lawfully credited to it, transferring the sale proceeds to your joint bank account amounts to a partial partition of the HUF, which is not recognised under the Income-tax Act.

Any income earned from the funds credited to your joint account and subsequently invested would continue to be taxable in the hands of the HUF. If the total income of the HUF, along with the income required to be clubbed as explained above, exceeds the basic exemption limit, filing an ITR for the HUF would be mandatory.