I would like to gift some listed shares held for the last 5-10 years to my HUF who will sell them immediately. The HUF will then buy a residential house, which will be used as a self-occupied house for the family, investing the entire amount received on the sale of shares. Will the capital gains earned by the HUF be exempted so that I can bypass the clubbing provisions?
Gifts received by an individual or HUF should not be treated as income unless the aggregate of all gifts received during the year exceeds fifty thousand rupees. Once the sum of all such gifts received during the years exceeds the limit of fifty thousand rupees, then the full value of all such gifts is treated as income without any basic exemption. However, gifts received from certain specific relatives should not be treated as income irrespective of the quantum of such gifts.
all members of one HUF come under the definition of specified relatives. Hence there is no tax liability for the HUF when you gift the shares owned by you to the HUF. However, the income earned by the HUF will be subject to clubbing provisions and the income earned from shares, be it capital gains or dividends, will be clubbed with your income.
In so far as the holding period for computing the nature of capital gain in the case of property received by way of gift or inheritance is concerned, the period for which the asset is with the previous owner, who had paid for it, is to be included for computing. Period of holding for the person selling such property. Since the holding period in the hands of the HUF for these listed shares would be more than 12 months, the profit made by the HUF would be long-term capital gain. You will be entitled to grand fathering provisions for computation of Long Term Capital Gains as the shares were sold before 31st January 2018.
Since the HUF is planning to buy a residential house with the entire sale proceeds of the shares, the HUF will be entitled to claim exemption under section 54F from long-term capital gains earned on the sale of shares. Whether a HUF can claim exemption under section 54F or not is litigation due to the applicability of clubbing provisions, but various Income Tax Tribunals have held that the income shall be income to be computed under the provisions of the Income Tax Act. Since the income under the head capital gains can be calculated only after effecting the exemption available under the head capital gains, you have a very good chance of winning even if you go to litigation in this case.
Since you are planning to use the house for self-occupation and since there will be no income from the house, there will be no addition of income as long as the house is used for self-occupation . Clubbing provisions on capital gains will apply to rent when you let out the property or sell it in future. The clubbing provisions will be applicable even if one asset is converted into another.
Balwant Jain is a tax and investment specialist and can be contacted on Twitter at jainbalwant@gmail.com and @jainbalwant.