Question: One of my daughter-in-law bought an apartment in Mumbai that is rented for $ 50,000 a month. She would like to voluntarily pay the rental income directly into my HUF in order to improve its corpus. I want to know if it’s completely legal or not. Does it make a difference if she transfers the house to the HUF instead of the rental income?
Reply: This is the case of transferring income without transferring assets. In accordance with the provisions of Section 60 of the Income Tax Act, income transferred without a transfer of the asset will be placed in the hands of the owner of that asset. The rental income therefore remains taxable in the hands of your daughter-in-law. The rental income transferred in this way will be treated as a gift to the HUF. Under income tax laws, any gift received from certain relatives is exempt in the hands of the recipient under Section 56 (2). Since the members, including the daughter-in-law, are certain relatives of the HUF, the HUF is not taxable on the rental income received in this way.
Not only the transferred income is added to the daughter-in-law, but also the investment income from the transferred rent is added to the income of your daughter-in-law, because the rental income is nothing more than a gift from your daughter-in-law to the HUF. The tax implications would not change even if they transferred the house to HUF, as the clubbing rules would continue to apply to the rent received by HUF for that property. However, the income from the reinvestment of rental income will be taxed in the hands of the HUF and not the subsidiary, as the clubbing rules apply to the income from the transferred asset and not to income from the transferred asset.
Balwant Jain is a tax and investment professional and can be reached at jainabalwant@gmail.com
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