Section 64(2) of Income Tax Act — Clubbing of Income for HUFs

Income tax laws are not just about earning & paying tax — they also prevent misuse of legal structures to avoid it. One such area is clubbing of income, especially in family setups like Hindu Undivided Families (HUFs). Section 64(2) of the Income Tax Act was introduced to close a specific loophole where individuals used to transfer personal assets into HUF ownership to reduce their tax burden.

Simply put, this section ensures that the income earned from converted property (from individual to HUF) is not tax-free or shifted to the HUF’s lower tax bracket. Instead, it continues to be taxed in the hands of the individual who transferred it.

The Background: Why Section 64(2) Was Introduced

Before this provision existed, individuals often transferred self-acquired assets like land, shares, or business ownership into their HUF to distribute income among family members & reduce taxable income. For instance, if a person earning ₹10 lakh transferred half of their property to HUF, only part of that income was earlier taxable in their name. The rest was shown as HUF income — taxed separately at a lower rate.

To stop this tax manipulation, Section 64(2) was enacted. It ensures that adding or including the income of another person (mostly family members) through indirect transfers doesn’t reduce the taxpayer’s liability unfairly.

Understanding the Concept of Clubbing of Income

Clubbing of income means adding someone else’s income to your own taxable income when certain conditions are met. This typically happens when a taxpayer diverts income to relatives or entities (like HUFs) to minimize tax liability. Section 64 deals with several such cases — like transfers to spouse, minor children, or HUFs.

Section 64(2) specifically addresses situations involving the conversion into HUF property, where an individual blends their self-acquired property into the common pool of family assets.

What Is Conversion into HUF Property?

Conversion into HUF Property refers to the act of an individual transferring personal or self-acquired property into the ownership of a Hindu Undivided Family.

This can happen in two ways:

1. Direct transfer – The individual officially transfers the property to the HUF."
2. Indirect transfer (blending) – The individual declares that their personal property will now form part of the HUF corpus without formal documentation.

Under Section 64(2), both scenarios are covered — and any income derived from such property is treated as belonging to the individual, not the HUF.

Also Read: Section 64 of the Income Tax Act – Clubbing of Income

Key Provisions of Section 64(2)

Here’s what Section 64(2) of the Income Tax Act states:

“Where, in the case of an individual being a member of a Hindu Undivided Family, any property having been the separate property of the individual has been converted by the individual into property belonging to the family, then, notwithstanding anything contained in any other law, the individual shall be deemed to have transferred the converted property, through the family.”

Let’s break it down in simple terms:

• If you convert your personal property into HUF property, you are deemed to have transferred it to the family.
• Any income arising from such converted property will be taxed in your hands, not the HUF’s.
• Even if this property is later divided among HUF members, the income from it remains taxable in the original owner’s name.

The Logic Behind the Law

The underlying idea is simple — to stop taxpayers from exploiting HUF status for tax savings.

Imagine you own a rental property earning ₹5 lakh annually. If you transfer it to your HUF, without Section 64(2), the rent would be taxed as HUF income, possibly at a lower rate. But under this section, the individual shall be deemed to have transferred the converted property, through the family, meaning any rental or capital income from that asset still belongs to you for tax purposes.

Hence, the intent is to maintain fairness & prevent artificial income splitting.

Example to Illustrate Section 64(2)

Let’s take a practical case.

Mr. Arjun, an individual, owns a commercial property generating ₹8 lakh annual rent. He decides to blend this property into his HUF so that the income appears as HUF income.

However, under Section 64(2):

• The property is treated as converted property.
• The rental income of ₹8 lakh will continue to be taxed in Mr. Arjun’s name, not in the HUF.
• Even if the property is later sold or gifted among HUF members, the capital gain remains taxable in Mr. Arjun’s hands.

This ensures there’s no tax leakage through internal family transfers.

Income from Reconverted Property

Sometimes, individuals retransfer such property from the HUF back to themselves or to another family member. Even in such cases, the income tracing back to the converted asset continues to be taxed under the original individual’s account.

This principle of “income tracing” ensures the source of the property determines taxation — not its current ownership structure.

Clubbing of Income for HUFs — Section 64(2) in Detail

Under Clubbing of Income for HUFs — Section 64(2), the following rules apply:

• The converted property’s income is added to the individual’s total income.
• The income is taxable in the same proportion as the individual’s share in the HUF.
• If the converted asset generates any further income (say interest, rent, or capital gain), that income also gets clubbed back with the individual’s income.

So, even if the HUF uses or reinvests the property, its earnings trace back to the original owner for tax computation.

Also Read: An Exclusive Tax Benefit for NPS Subscribers

When Clubbing Under Section 64(2) Does Not Apply

There are a few exceptions where this section does not apply:

• If the property is transferred for adequate consideration (like sale at fair market value)."
• If the transfer was done before the formation of the HUF.
• If the HUF acquires property independently through loans, inheritance, or gifts from unrelated persons.

In such cases, the income is genuinely the HUF’s & won’t be clubbed with the individual’s income.

Tax Implications — Key Scenarios

This ensures the original taxpayer remains accountable for the income stream, even when ownership formally shifts.

Judicial Interpretation of Section 64(2)

Several court rulings have reinforced the principle of this section.

For instance, in CIT vs. Pushpa Devi, the court observed that merely blending assets into an HUF does not alter the tax liability of the individual who originally owned them.

The courts have consistently held that the source of income determines taxation — not the entity holding it.

Why Section 64(2) Matters Today

In modern tax planning, HUFs are often used as family investment vehicles. While legitimate HUF income is perfectly legal, misuse through artificial transfers can lead to scrutiny.

Section 64(2) helps maintain transparency by ensuring that only genuinely earned HUF income (like ancestral property, gifts, or business profits) is taxed separately — not income artificially diverted from individuals.

Compliance and Documentation Tips

If you operate or plan to form an HUF, keep these compliance tips in mind:

• Avoid converting self-acquired property unless absolutely necessary.
• If conversion is made, keep clear records stating the date, purpose, and nature of the asset.
• Report any income from such property in your individual ITR to avoid future disputes.
• Consult a Chartered Accountant to correctly classify “converted property” & “HUF-owned assets.”

Proper documentation prevents unnecessary clubbing disputes during assessment.

Also Read: Standard Deduction on House Property Income

Quick Recap — Section 64(2) Highlights

Conclusion

Section 64(2) of the Income Tax Act serves as a crucial anti-avoidance measure, ensuring fair taxation when property is converted into HUF property. It prevents misuse of HUF status by ensuring that income derived from such assets remains taxable in the hands of the original owner. In essence, this section enforces the idea that ownership may change, but tax responsibility follows the source. If you manage HUF finances or family assets, understanding this section can help you plan smarter, stay compliant, & avoid penalties.

Need Expert Help for HUF Tax Planning?

At Callmyca.com, our tax professionals specialize in clubbing of income for HUFs, property conversion rules, & capital gain planning under Section 64(2).
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