Equity Shares as loan to HUF

Taxation
1

Hi

I am aware that a karta can give a loan to HUF and the earnings from the same do not attract clubbing provisions.

Can the same principle be used to provide equity shares held by Karta as a loan to HUF through a proper loan agreement? The intention is for HUF to use the shares as collateral for generating trading income.

Thanks

Atul

2

Hi @Life_of_ATK,

If you want to use shares as a collateral then you need to have their ownership. Also, shares cannot be given as loan to another entity.

Thus, HUF can use the shares as a collateral when it has the ownership of the same and if you transfer the ownership it will attract the provisions of clubbing of income. Any income generated by using these shares will also be clubbed with the income of the Karta.

3

Can I gift funds to HUF whenever I want ?

Does income generate from those funds will be consider as income clubbing?

4

Can Karta give loan (money) to HUF at 0% interest or does it have to some minimum percentage interest?

Any documentation needed for the same?

All I want is minimum compliance headache and no clubbing of provisions.

5

Hi @bharat1080 ,

As per section 56(2)(x) gift given by the members of the HUF will not be taxable in the ITR of HUF. Thus, you can gift funds to an HUF anytime.

However, the income generated from those funds will be clubbed with your income under Section 64(2) of the Income Tax Act. This applies if you’re a member of the HUF and the gifted amount is used to generate income.

But if the HUF reinvests the income earned (instead of using the original gift), the subsequent income won’t be clubbed with yours.

Hope this clears your doubt.

6

Hello @entice ,

Yes, the Karta can give a loan to the HUF at 0% interest, but it’s better to charge a reasonable interest rate to avoid any tax scrutiny. In case of 0% interest rate, the ITD might treat it as gift and the income earned on the same will be clubbed with the member’s income.

Minimum compliance required to avoid these queries from ITD in case of loan to HUF:

  1. create a simple loan agreement,
  2. Pay interest at industry rate or bank interest rates
  3. Keep accounting records related all these transaction

This way, the loan stays a loan, and there’s no clubbing of income.

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