Navigating the Tax Impact of Transfer of Self-Acquired Property to HUF

Transferring self-acquired property to a Hindu Undivided Family (HUF) is a common practice among Hindu taxpayers. While an HUF offers unique tax advantages, the transfer of self-acquired property to an HUF triggers specific provisions under Section 64(2) of the Income-tax Act, particularly for the attribution of income back to the original owner.

In this article the implication of such transfer have been discussed with practical examples.

Understanding Section 64(2) of the Income-tax Act:

Section 64(2) applies when an individual transfers self-acquired property to an HUF without adequate consideration. The property is then treated as "converted property," and any income or capital gains arising from it is attributed to such individual. Even if the HUF sells the property and reinvests the sale proceeds, Section 64(2) attributes both the original capital gains and any subsequent income generated to the individual in view of Explanation-1 of section 64(2), as per which “property" includes–

• any interest in movable or immovable property,
• the proceeds of sale movable or immovable property,
• any money or investment representing the proceeds of sale of movable or immovable property, and
• If the movable or immovable properrty is converted into any other property by any method, such other property.

Illustrative Examples:

Let us understand the implications of such transfer with one example:

Mr. Ramesh owns a self-acquired residential property, which he transfers to his HUF without consideration. The HUF subsequently sells the property for ₹1 crore, resulting in a long-term capital gain (LTCG) of ₹60 lakh. The HUF deposits the sale proceeds in a Finance Company in fixed deposit, which generates ₹5 lakh in interest income annually.

Here’s how Section 64(2) applies:

• Capital Gains Tax Attribution: Despite the property being transferred to the HUF, the ₹60 lakh capital gain will be taxed in the case of Mr. Ramesh, as it arises from the "converted property." Accordingly, Mr. Ramesh will be responsible for paying LTCG tax on ₹60 lakh, not the HUF.
• Income from Fixed Deposits: The ₹5 lakh interest income generated from the fixed deposit of the sale proceeds is also taxable in the hands of Mr. Ramesh under Section 64(2).

This example illustrates how both capital gains and subsequent income generated from the sale proceeds of converted property are attributed to the original owner.

Conclusion:

Section 64(2) serves to prevent tax avoidance through the transfer of self-acquired assets to an HUF by ensuring that capital gains and any income from converted property remain taxable in the hands of the original owner. Taxpayers should carefully consider the impact of this section before transferring property to an HUF, as both capital gains and subsequent income from sale proceeds will continue to be attributed to them, not the HUF. With prudent planning, individuals can still make use of tax exemptions on capital gains, but it’s essential to understand that the tax liability ultimately rests with the person who originally owned the property.

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Disclaimer:

This article is based on my personal understanding of the relevant provisions of the Income-tax Act and should not be construed as professional advice. Please consult a tax professional for specific guidance.

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