Are you a U.S. tax resident with income from a Hindu Undivided Family (HUF) in India? Curious about how the IRS views HUF income and your tax obligations in the U.S.? Here's your complete guide to understanding the U.S. tax treatment of HUF income, gift tax implications, and how the Double Taxation Avoidance Agreement (DTAA) protects your earnings.

Understanding the Basics: Is HUF a Separate Taxable Entity in the USA?

A Hindu Undivided Family (HUF) is a unique concept under Indian law, but how does the U.S. Internal Revenue Service (IRS) view it? Does it consider an HUF as a separate entity like a foreign trust, or is the income attributed to the Karta?

Good news: Based on how the IRS interprets fiduciary roles and ownership rules, an HUF is likely to be treated as a separate foreign entity, not a grantor trust. This is because the Karta (manager of the HUF) is not the "grantor" or "donor" of the HUF assets, and his fiduciary role does not equate to ownership.

IRS Rules and Trust Provisions: Do They Apply to HUFs?

Several sections of the Internal Revenue Code (IRC), such as Sections 673–677 and 679, apply primarily to grantor trusts where the U.S. person contributes assets or retains control. However:

• The Karta is not the donor of the HUF property.
• IRC Section 678 can apply if a beneficiary has the power to claim income/principal—but since the Karta acts in the family’s interest and cannot act solely for personal gain, this section also does not apply.

The HUF therefore remains a foreign non-grantor trust-like entity, and its Indian income is not automatically taxable in the U.S., even if the Karta resides in the U.S.

Property Contributions by U.S. Residents to HUF: Beware of IRC Section 679

If a U.S. tax resident contributes U.S. income or assets to a HUF, especially where the coparceners (members) are also U.S. residents, then IRC Section 679 can trigger tax consequences. The person who transferred the asset could be treated as still owning the property for U.S. tax purposes—meaning:

• They may be taxed on unrealized gains.
• Section 684 may also apply if the HUF is considered a foreign non-grantor trust, and the property is appreciated.

When Is HUF Income Taxable in the USA?

If the HUF is treated as a foreign non-grantor entity, here’s how U.S. taxation may apply:

• Current distributions of income or gains to U.S. resident coparceners are taxable in the U.S..
• Accumulated income or gains, if distributed later (especially on termination or partition of the HUF), may attract complex IRS rules involving interest charges on deferred taxes—similar to foreign trust rules.

That said, the HUF itself is not taxable in the U.S. if:

• It earns non-U.S. sourced income (e.g., rental income from Indian property, capital gains from Indian investments), and
• None of its U.S. members have made direct transfers of U.S. property or income into the HUF.

Gift and Generation-Skipping Transfer (GST) Tax Considerations for HUFs

Under U.S. gift tax laws, any transfer of assets to an HUF by a U.S. citizen or domiciled person could be treated as a taxable gift. Similarly, partition of the HUF might be misconstrued as a gift by the Karta, though legally in India:

• Partition is a natural consequence and not a voluntary gift.
• The Karta does not have a personal property interest in the HUF assets.

Regarding GST tax, if a U.S. person transfers property to a HUF benefitting grandchildren or more remote descendants, GST tax rules may apply—but only if the initial transfer was taxable in the U.S..

Double Taxation Avoidance Agreement (DTAA): Your Shield Against Double Taxation

India and the U.S. have a robust DTAA that allows for credit of taxes paid in India against U.S. tax liabilities on the same income. With the right DTAA consultancy, this can particularly benefit U.S. resident coparceners receiving:

• Interest income from Indian banks in HUF name
• Capital gains from HUF-held Indian shares or mutual funds
• Rental income from Indian property held by the HUF

Under the DTAA, such passive income often qualifies for relief, preventing double taxation.

Key Takeaways: What NRIs & U.S. Residents Must Know About HUF Taxation

• HUF is typically treated as a separate foreign entity, not a grantor trust, by the IRS.
• Income retained in the HUF is not taxable in the U.S., but distributions to U.S. coparceners are.
• U.S. residents contributing to HUFs must be cautious of IRC Section 679 and 684.
• Gift and GST tax rules may apply to U.S. residents transferring assets to an HUF.
• The DTAA between India and USA offers protection against double taxation of HUF income.

Need Help Navigating HUF Taxation as a U.S. Resident or NRI?

At Dinesh Aarjav & Associates, we specialize in NRI taxation, cross-border tax planning, and U.S.–India tax compliance. Our team of international tax experts helps U.S. residents with Indian HUF income:

• Avoid double taxation
• Comply with FATCA and FBAR reporting
• Structure HUF and family assets tax-efficiently

Get in touch today to safeguard your HUF income and ensure U.S. tax compliance without headaches.