Can my mother give loan to my HUF at rate of 12% and use this interest as income from other sources. Then can HUF use this loan interest to offset his short term capital gain and other income?

Income Tax 1961 Income from Other Sources
1

Can my mother give loan to my HUF at rate of 12% and use this interest as income from other sources. Then can HUF use this loan interest to offset his short term capital gain and other income ?

2

Yes, your proposed structure can work in principle, but it must follow proper tax rules and documentation to be valid under the Income Tax Act.

1. Loan from Mother to HUF at 12% Interest

Yes, your mother can legally give a loan to your HUF and charge interest (e.g., 12%).

  • The interest earned by your mother will be taxable under “Income from Other Sources.”

  • Ensure the loan is:

    • Properly documented (loan agreement)

    • Transacted through banking channels

    • Interest is actually paid (not just book entries)

2. Tax Treatment in the Hands of HUF

The HUF can claim the interest paid to your mother as an expense, but only if:

  • The borrowed funds are used for income-generating purposes (e.g., investment in shares, business, etc.)

  • There is a clear nexus between the loan and the income earned

3. Set-off Against Short-Term Capital Gains (STCG)

This is where careful interpretation is required:

  • If the loan is used specifically for investment in shares or assets, then:

    • Interest may be allowed as a deduction under Section 57 (if income is taxable under “Other Sources”)

    • OR may be considered in cost of acquisition / improvement depending on the nature of investment

  • However, interest expense cannot be directly set off against STCG unless:

    • It qualifies as a deductible expense related to that specific income source

:backhand_index_pointing_right: In most cases:

  • Interest paid cannot be directly adjusted against STCG

  • But it can be claimed against income from other sources or business income (if applicable)

4. Key Compliance Points

To avoid scrutiny:

  • Maintain proper documentation

  • Ensure reasonable interest rate (12% is generally acceptable if justified)

  • Avoid circular transactions

  • Show actual utilization of funds

5. Expert Tip

Tax treatment may vary depending on facts (investment type, income head, etc.). It’s always better to structure this correctly with guidance.

:backhand_index_pointing_right: For detailed tax planning strategies and practical examples, you can explore:
Smart Tax Planning Guide

Conclusion

:check_mark: Yes, your mother can give a loan and earn interest taxable in her hands
:check_mark: HUF can claim interest as expense if used for earning income
:red_exclamation_mark: Direct set-off against STCG is generally not allowed, unless properly linked and justified