Help! I Transferred Money to My HUF Account. Can I Take it Back?

Ans: Gift received by member from HUF is Income in the hands of Members, as gift received from HUF is not considered as relative (which is not an income).

Accordingly, question of giving same amount will not arise and if HUF deposit amount in PPF account, it will be considered as Income in the hands of member and member will not be able to claim deduction also.

All the members to HUF have equal rights in HUF.

Ans: A Karta or any member of a Hindu Undivided Family (HUF) can provide an interest-free loan to the HUF.

The repayment can be flexible, depending on the availability of funds with the HUF.

There is no restriction under the Income Tax Act on such transactions if they are genuine.

The loan amount should be properly recorded in the books of the HUF.

There should be a clear distinction between a loan and a gift to avoid tax complications.

Clubbing of Income – Will It Apply?
If a member gives an interest-free loan, the clubbing provisions under Section 64 of the Income Tax Act do not apply.

The loan amount remains a liability in the hands of the HUF and does not generate taxable income for the lender.

Clubbing applies only if a gift is made to the HUF and income is generated from that gift.

If a Karta or member gives a gift instead of a loan, any income earned on that gift will be clubbed with the donor’s income.

If the loan is genuine and documented, there is no tax liability for the lender due to clubbing.

Documentation Requirements for Loan to HUF
Proper documentation is essential to prove the authenticity of the loan.

A loan agreement should be created, stating the principal amount, repayment flexibility, and interest (if any).

The agreement should mention that the repayment will be made as and when funds are available.

Notarization of the agreement is not mandatory but is advisable for legal clarity.

An informal written agreement may be sufficient, but a notarized or stamped document adds legal strength.

The transaction should be reflected in the bank statements of both the lender and the HUF.

The loan should be recorded in the HUF’s books under liabilities.

Taxation of Interest-Free Loan to HUF
Since the loan is interest-free, there is no tax deduction for interest payments by the HUF.

The lender does not earn any taxable income from the loan, so no tax liability arises.

If the HUF invests the loan amount and earns income, that income is taxable in the hands of the HUF.

The income earned by the HUF will not be clubbed with the lender's income, as long as the transaction is a loan and not a gift.

Repayment Considerations
The HUF can repay the loan in installments or lump sum, depending on financial availability.

The repayment should be properly recorded in the books of accounts.

Partial repayments should be documented to track the outstanding balance.

If the HUF is dissolved in the future, the loan should be settled before asset distribution.

Alternative Approaches to Fund the HUF
Instead of a loan, members can contribute capital to the HUF, but this will change the tax implications.

Gifts from members to HUF can be made, but the income from such gifts may be clubbed with the donor’s income.

If a loan is given with nominal interest, the lender can earn interest income, which will be taxed as per their slab rate.

Final Insights
A Karta or member can provide an interest-free loan to the HUF without tax complications.

Clubbing of income does not apply if the transaction is structured as a loan.

Proper documentation is necessary to ensure tax compliance and legal validity.

A written agreement is advisable, and notarization can provide additional legal protection.

The HUF should maintain clear accounting records to track the loan and its repayment.

Consulting a tax professional can help structure the transaction in the most tax-efficient manner.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment