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Capital Creation in a HUF

If properly planned, capital can be created in a HUF without attracting any tax provisions. The popular methods of doing this are:

1. Gifts from Relatives from members of HUF:

U/S 56(ii) of I.T. Act, 1961, gifts received from relatives of members of the HUF are fully exempt from tax. This is one of the most popular ways of creating capital corpus in HUF.

2. Gifts received at marriage:

Gifts received at the time of marriage of any member of HUF are fully exempt from tax. Only exception here is when gifts are received at the time of marriage of daughter, they are taxable.

3. Ancestral Property:

The ancestral property belongs to the whole family and not just one Individual. It can be transferred to HUF tax-free to create capital.

Also, the money received on sale of ancestral property /assets can be transferred into HUF.

4. Gifts from non-relatives:

Gifts received from people who are not relatives of members of HUF, are exempt upto Rs. 50,000 in a fiscal year. Any gift value exceeding Rs. 50,000 will be taxable.

5. Gifts from members of HUF:

A member can also give gifts to HUF to create capital.

However, if the HUF invests this amount and any income is generated, that income is clubbed with the income of the contributing member.

If the gift is invested in a tax free financial instrument, then any income generated will not be taxed to contributing member.

Also, when such financial instrument will reach maturity, the money can be reinvested by the HUF without attracting clubbing provisions anymore.

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