An NRI may want to transfer money from an NRO account to a family HUF for investment or family wealth-planning purposes.
But this raises three important questions:
Is the NRI taxed for making the gift?
Will the HUF have to pay tax when it receives the money?
Who pays tax on the income subsequently generated from that money?
The answers are different at each stage.
1. Is the NRI Taxed When Making the Gift?
Generally, making a genuine gift of money does not itself create income-tax liability for the donor simply because the money has been transferred.
The more important tax question arises in the hands of the recipient of the gift and in relation to income subsequently generated from the transferred assets.
Therefore, if an NRI transfers money from an NRO account to an HUF, the transfer itself should not be confused with taxable income earned by the NRI merely because the gift was made.
2. Is a Gift Received by an HUF Taxable?
Under the Income-tax Act, 2025, money received without consideration can ordinarily become taxable under Income from Other Sources when the prescribed conditions are met.
However, there is an important exemption for gifts received from a relative.
For an HUF, the law specifically defines a relative as:
“Any member” of that HUF.
This distinction is critical.
Suppose an NRI son is a member of his father’s HUF and transfers money to that HUF as a genuine gift.
Because the donor is a member of the HUF, the HUF can fall within the relative exemption. Consequently, the gift itself would generally not be taxable as gift income in the hands of the HUF.
The key requirement is that the person making the gift must actually be a member of the HUF receiving it.
3. The Important Catch: Clubbing of Income
This is where many taxpayers miss an important tax rule.
The fact that the HUF can receive the gift without immediate gift tax does not necessarily mean that the investment income generated from that money will also be taxed in the HUF’s hands.
Under the current Income-tax Act, where an individual who is a member of an HUF transfers property to the HUF without adequate consideration, income derived from that property is deemed to be the income of the individual who transferred it.
The Income Tax Department has also explained the equivalent clubbing principle under the earlier law: where a member transfers an asset to the HUF without adequate consideration, the income arising from that asset is clubbed with the transferor’s income.
Example
Assume an NRI who is a member of his father’s HUF gifts:
₹50 lakh to the HUF.
The HUF invests that money and earns:
₹4 lakh of income.
The ₹50 lakh gift itself may qualify for the relative exemption in the HUF’s hands.
However, the ₹4 lakh earned from the transferred funds can be subject to the clubbing provisions and included in the donor-member’s taxable income in accordance with the applicable rules.
So, gifting money to an HUF should not be viewed as a simple method of shifting investment income into another tax entity.
4. Can an NRI Gift Money from an NRO Account to an HUF?
From a foreign-exchange perspective, NRO accounts permit local payments in rupees, subject to applicable FEMA regulations and authorised dealer bank requirements.
Therefore, an NRI transferring his own funds from an NRO account to an eligible resident HUF bank account can generally fall within the framework for local rupee payments, subject to the bank’s documentation, KYC and FEMA compliance requirements.
It is advisable to maintain proper documentation showing that the transfer represents a genuine gift, including banking records and an appropriate gift declaration or deed where required.
NRI Gift to HUF: Tax Treatment at a Glance
At the time of gifting:
The donor generally does not pay income tax merely for making the monetary gift.
When the HUF receives the gift:
If the donor is a member of that HUF, the gift can qualify for the relative exemption and may not be taxable in the HUF’s hands.
When the gifted money generates income:
Income arising from the property transferred by the member to the HUF can be clubbed with the donor-member’s taxable income.
The Key Takeaway
An NRI can potentially gift money to an HUF without creating an immediate income-tax liability on the gift where the relevant conditions are satisfied.
But the real tax planning begins after the gift is made.
The HUF’s exemption on receiving the money should not be confused with exemption of future investment income. The clubbing provisions can bring income generated from the gifted corpus back into the donor’s taxable income.
Before transferring a substantial amount, NRIs should therefore evaluate the transaction from three angles: Income Tax, HUF membership and FEMA compliance.
A correctly structured transaction can avoid unnecessary tax complications, while an incorrectly understood gift can produce a very different tax outcome from what the family intended.
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