Are shares transferred to an HUF by members eligible for tax benefits?

I have two questions regarding taxation of assets transferred to an HUF. 1) Will tax benefits like cost carryover, LTCG exemption, etc. be applicable on the shares transferred to an HUF by its members?? 2) Can a coparcener (including Karta) fund the HUF with personal gifts or assets?

—Name withheld on request

If shares are inherited or received by will, the HUF is entitled to the original cost and holding period benefits under capital gains provisions.

However, if a member gifts shares to the HUF, the gift is not taxable under Section 56(2)(x), since a member is treated as a “relative” of the HUF. But the story doesn’t end there.

While the HUF is entitled to preserve both the original cost of acquisition and the holding period of the gifted shares, the real challenge lies in the clubbing provisions. Any income arising from such shares, whether dividends or capital gains, continue to be taxed in the hands of the member who contributed them.

As a result, although cost and period benefits are legally preserved, the clubbing provision significantly limits the tax utility of gifting shares to the HUF.

Thus, it is advisable to transfer the shares to the HUF using inheritance instead of gifts.

To answer the second question, yes, a coparcener (including the Karta) may voluntarily contribute personal assets or funds to the HUF. While such contributions are not taxable under gift tax provisions, the clubbing provisions under section 64(2) still apply. It mandates that any income derived from those assets, or from assets acquired out of them, shall be clubbed with the income of the contributor.

This rule applies permanently, irrespective of whether:

• The original asset is later sold or reinvested,

• The income is accumulated or transformed into another form.

In practice, this also creates compliance complexity, especially in scrutiny assessments, where tracing income back to specific contributions may require detailed documentation spanning multiple years.

To summarise, while the gift itself is tax-exempt, the income from it does not benefit from tax separation, unless the capital originated from outside the HUF framework.

Therefore, capitalising the HUF through acceptable modes, for example, inheritance, small non-member contributions (within the limit of ₹50,000 per year) or preferably through documented loans with interest, remains a more efficient tax planning strategy.

CA Vijaykumar Puri, partner at VPRP & Co LLP, Chartered Accountants