A tax-free receipt does not settle who pays tax on the income
For tax year 2026-27, a member transferring personal property to an HUF without adequate consideration must examine section 99(3) of the Income-tax Act, 2025. Income derived from the converted property is included in that individual’s income, with corresponding exclusion from the HUF. The receipt-side relative exemption and the subsequent income-attribution rule answer different questions. Opening an HUF account or obtaining a PAN does not defeat clubbing.
Use the provision applicable to the period
The Income-tax Act, 2025, as amended by Finance Act 2026 applies from 1 April 2026. This article uses tax year 2026-27, rather than treating the old Act’s assessment-year terminology as interchangeable. For FY 2025-26/AY 2026-27 and relevant legacy proceedings, section 64(2) of the 1961 Act is the earlier provision. The 2025 Act’s section 99(3) and (4) carries the converted-property rule and its exclusion for property converted on or before 31 December 1969. Clubbing is not a new restriction introduced for the first time in 2026. Sources were checked on 22 October 2026.
Apply two tests to each receipt
First classify receipt-side taxation. Under section 92(2)(m), read with section 92(3) and the relative definition in section 92(5), an HUF’s member is its relative. Money received from that member can therefore fall within the relative exception. A person who is a relative of the karta individually is not automatically a relative of the HUF. In non-exempt money receipts without consideration, the annual aggregate exceeding ₹50,000 brings the whole relevant aggregate into the rule, rather than only the excess. Other exceptions, including inheritance, require their own evidence.
Second trace income. Section 99(3) addresses personal property impressed with HUF character, thrown into the common stock, or transferred directly or indirectly to the family without adequate consideration. The statutory property concept is wider than the original bank deposit: follow replacement assets and sale proceeds as applicable under the section’s definitions. A new investment number or bank account is not proof of a new independent source.
Prepare a donor-wise attribution schedule
Record the donor/member, the nature and ownership of the original property, date and amount transferred, consideration, destination account, replacement assets, income earned and the person in whose return it is included. Reconcile aggregate income in the HUF books to the amounts retained in the HUF computation and those attributed to each individual. Where income is already computed under its relevant head, attribute the supported taxable amount; do not mechanically club gross receipts while claiming related deductions again elsewhere.
Separate genuine independent family funds from converted member property. Maintain documentary evidence for inherited property and other asserted family capital; a recital in a deed cannot establish the entire title history. An HUF is not created merely by calling an individual’s business or income family income. Personal-law status, beneficial ownership, business arrangements, losses, sale gains and any partition require their own analysis.
Mixed funds and partitions need evidence, not a default percentage
Separate deposits provide a cleaner trail than a pooled balance. If funds are mixed, a reasonable documented attribution must follow the actual investment and income trail; there is no universal statutory pro-rata formula for every HUF account in section 99(3). The mixed-fund example below assumes a specifically evidenced equal-duration investment. Income earned by investing previously earned income can raise a different attribution question: do not label it automatically clubbed or automatically exempt without tracing the facts.
Section 99(3)(ii) also addresses income from converted property received by the transferor’s spouse on partition. Do not assume distribution ends the analysis. Recognition of a partition for tax purposes and other family members’ positions require separate review. This article does not recommend a partition or a tax-saving arrangement.
Worked illustrations
The following cases use fictional figures and stated assumptions. Amounts are Indian rupees unless a different unit is expressly shown. They illustrate preparation controls and do not represent real client results.
Illustrative example 1: a member gifts a deposit principal
A member gifts ₹10,00,000 of personal funds to the HUF on 1 April 2026. A separate deposit earns 6% simple interest for the full year: ₹10,00,000 × 6% = ₹60,000. Assuming the stated ownership and transfer facts, receipt-side relative relief does not prevent the ₹60,000 interest being attributed to the member under section 99(3). The principal itself is not annual interest income.
Illustrative example 2: the investment runs for only six months
A personal-funds gift of ₹8,00,000 is placed in a separate HUF deposit on 1 October 2026 at 7.5% simple annual interest. Assume exactly six months of accrual for this illustration. Income is ₹8,00,000 × 7.5% × 6/12 = ₹30,000, traced to the donor. Use the actual bank accrual and contractual day basis in the return, rather than assuming a full ₹60,000 year.
Illustrative example 3: two members remain two attribution records
Member A contributes ₹6,00,000 and Member B contributes ₹4,00,000 of personal funds to separate one-year deposits earning 6%. Interest is ₹36,000 for A’s converted property and ₹24,000 for B’s. The combined ₹60,000 is not all allocated to the karta merely because the karta operates the account.
Illustrative example 4: independent and converted capital are kept distinguishable
Assume verified independent HUF capital ₹12,00,000 and a member’s converted personal capital ₹8,00,000 fund a specifically traced full-year investment at 6%. Total interest is ₹1,20,000: ₹72,000 relates to independent funds and ₹48,000 to the converted funds. This allocation follows the stated equal-duration evidence; it is not a rule for arbitrary pooled accounts.
Illustrative example 5: a karta’s individual relative is not an HUF member
Assume an unrelated-to-the-HUF donor who is not its member makes two non-exempt money gifts of ₹30,000 and ₹25,000 during the tax year. The relevant aggregate is ₹55,000. Section 92(2)(m) includes ₹55,000, not ₹5,000, subject to the stated absence of another exception. A relationship with the karta alone does not establish the HUF-member exception.
Illustrative example 6: reconcile the book income to two tax computations
The HUF books contain ₹1,50,000 deposit interest. Source records establish ₹54,000 from Member A’s converted funds, ₹36,000 from Member B’s converted funds and ₹60,000 from independent HUF funds. Allocate ₹90,000 to the two individuals and retain ₹60,000 in the HUF computation. The reconciliation is ₹54,000 + ₹36,000 + ₹60,000 = ₹1,50,000; do not tax the same ₹90,000 again in the HUF.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Confirm the relevant tax year and Act. | Period-specific provision reference. |
| 2 | Establish HUF status and property ownership. | Family and title records, not PAN alone. |
| 3 | Identify each donor and actual HUF membership. | Member register and relationship evidence. |
| 4 | Classify receipt-side exemption or taxation. | Section 92 receipt schedule. |
| 5 | Identify converted personal property and consideration. | Transfer instrument and banking trail. |
| 6 | Trace replacement investments and proceeds. | Asset-by-asset movement ledger. |
| 7 | Compute income under the relevant head. | Accrual and deduction working. |
| 8 | Attribute income separately to each transferor. | Donor-wise source schedule. |
| 9 | Review mixed funds, reinvestment and partitions. | Documented specific conclusions. |
| 10 | Reconcile HUF and individual computations. | No-double-counting bridge and return records. |
Sixteen practitioner FAQs
1. Does the HUF-member exemption remove clubbing?
No. Receipt taxation under section 92 and attribution under section 99 are separate tests.
2. Is section 99 clubbing new from 2026?
The 2025 Act renumbers and restates the rule; section 64(2) contained the earlier converted-property restriction.
3. Which provision applies to FY 2025-26?
Use the 1961 Act for FY 2025-26/AY 2026-27, subject to the applicable transition and proceedings provisions.
4. Does the karta bear all clubbed income?
No. Identify the individual who owned and converted the relevant property.
5. Is a karta’s uncle automatically an HUF relative?
No. For this receipt-side definition, establish whether the donor is a member of that HUF or another exception applies.
6. Is only the money above ₹50,000 taxable?
For non-exempt money receipts within section 92(2)(m)(i), exceeding the annual threshold brings the whole relevant sum into the provision.
7. Can a gift deed prove independent HUF capital?
It records asserted terms, but the actual ownership, donor identity and source must be evidenced.
8. Does buying a different asset break the trail?
No automatic break arises. Examine the statutory property definitions and trace substituted property and proceeds.
9. Are genuinely independent family funds also clubbed under this rule?
Not merely because they belong to the HUF. Establish whether they originated from converted personal property.
10. Is a fixed pro-rata split mandatory for every pooled account?
No. The allocation must be supported by the actual funds and income trail.
11. Should gross rent always be included as clubbed taxable income?
Compute income under the relevant head and attribute the supported amount, avoiding duplicated deductions.
12. Can a joint bank account alone establish an HUF asset?
No. Beneficial ownership and the legal transfer facts still matter.
13. Does partition automatically stop attribution?
No. Section 99(3)(ii) specifically addresses the spouse’s income from converted property received on partition.
14. What happens to the amount included in the individual’s income?
Section 99 provides corresponding exclusion from the HUF or spouse to prevent the same attributed income being counted there again.
15. Should income on reinvested income be assumed to follow the principal?
Do not assume either result. Trace the distinct income stream and apply the relevant legal analysis.
16. Does the example calculate final tax payable?
No. It allocates income; rates, deductions, losses, tax regime and credits require separate computation.
Organising the supporting working
Keep the underlying records, calculation and conclusion linked to the same entity and period. When organising work with assureTax and the assureOffice tools, retain these supporting schedules alongside the final output and use only the features confirmed for the version available to you.
Conclusion
Before treating HUF income as independently taxable, establish both the receipt exemption and the source of the income-producing property. A donor-wise reconciliation makes the section 99 inclusion and corresponding HUF exclusion visible.