Inherited Shares May Not Qualify as HUF Assets Under Transfer Rules

Understanding the Rights to Inherited Shares Under the Hindu Succession Act

Shares inherited from a parent are often misunderstood as ancestral property, but tax and succession laws treat them differently. The Hindu Succession Act, 1956, plays a crucial role in determining the ownership of inherited shares.

Decoding the Laws

The Hindu Succession Act, 1956, came into force on June 17, 1956, and abolished the concept of ancestral property in respect of assets owned by a Hindu who dies after this date. According to the Act, assets left behind by a Hindu who dies after June 17, 1956, are inherited by all the legal heirs as their personal assets, not ancestral assets.

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A Specific Case

In a recent query, a person inquired about the rights to inherited shares. The person's father died 10 years ago, leaving behind shares that were transferred to the individual's demat account after the father's demise. The person's mother died 3 years ago, and they are one of seven legal heirs, with three brothers and three sisters. The person is the eldest and is married, while the others are unmarried.

Expert's Advice

The expert advised that the shares inherited by the person from their father are their personal property, not HUF assets. Since the father died after June 17, 1956, the shares were inherited by all the legal heirs as their personal assets. The shares inherited by the person's mother would also have been inherited by the six siblings in equal parts if she did not leave a valid will.

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Tax Implications

If the person transfers the shares to their HUF, the same will attract clubbing provisions. All the legal heirs should have shown the respective income in their ITR after the death of their father, as the shares got inherited immediately on death without anything required to be done by anyone.

Gift and Tax Implications

Presuming that the transfer of these shares to the demat account is done with the consent of all the legal heirs, the same can be treated as a gift by the mother and siblings, which does not have any tax implications for anyone. However, if the person transfers these shares to their HUF, the same may be treated as a gift made by the person to their HUF. The gift received by an HUF from its members is not treated as its income because the member is treated as a relative of the HUF. However, the clubbing provisions will come into play in respect of the income that arises to the HUF from the shares so transferred.