F&O tax for HUF when gift loan and scenarios

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A J

4 Points Posted on 29 August 2024

Karta does the F&O trading from HUF DEMAT account, the trading generates income. Now in the given scenarios, who should show this income for tax purpose, HUF or Karta.

HUF capital is used for trading.

Karta provides interest free loan to HUF for trading purpose.

Karta gifts money to HUF for trading purpose.

Karta provides loan at nominal rate to HUF, loan deed is also present with required information.

I have gone through multiple such pages and information online, but answers are not very clear.

In some cases, it was discussed that as this requires active involvement of Karta, hence even if its HUF capital, income should be clubbed with Karta's income and Karta should pay taxes for it.

Is their a way to ask the same directly to income tax department directly and get a definite answer.

Replies (2)

Rama chary Rachakonda

Master in Accounts & high court Advocate

9615 Points Posted on 29 August 2024

In this scenario, the income generated from F&O trading in the HUF DEMAT account is considered income of the HUF (Hindu Undivided Family). As per Income-tax Act, 1961, HUF is a taxable entity, and the Karta (the manager of the HUF) is responsible for filing the tax return on behalf of the HUF. So, in this case: - The HUF should show this income for tax purposes. - The Karta should file the tax return (ITR-5) on behalf of the HUF and report the income from F&O trading. - The Karta's individual income tax return (ITR-1 or ITR-2) should not include this income. However, it's important to note that if the Karta uses the HUF funds for personal benefits or mixes HUF and personal funds, it may lead to clubbing provisions under Section 64(2) of the Income-tax Act, 1961. This means the income may be taxed in the hands of the Karta. Consult a chartered accountant or tax professional to ensure compliance with tax regulations and to avoid any potential tax implications.

A J

4 Points Posted on 31 August 2024

Sir, when you say

"However, it's important to note that if the Karta uses the HUF funds for personal benefits or mixes HUF and personal funds, it may lead to clubbing provisions under Section 64(2) of the Income-tax Act, 1961. This means the income may be taxed in the hands of the Karta.".

but in my case 1, where "HUF capital is used for trading.", profit remains in HUF account. hence not for personal benifit, and no use of Karta's perosnal fund, hence no obligation of taxes for Karta. Right?