How to distribute the units of mutual funds on partition of HUF

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Please let me know how to distribute the units of Mutual Funds on partition of HUF. I am told that we will need to liquidate all the units and then to distribute in the form of cash or equivalent thereof which will attract Capital Gain Tax. The HUF consisted of Husband (Karta), Wife and Married Daughter. Wife has expired recently. Whether father and daughter can continue the HUF or it will be necessary to partition the same. I will be obliged if you can show me a way out and save ourselves from capital gain tax. Is it necessary to enter into partition deed or we can go without it? If partition deed is executed whether it attracts Stamp duty and registration charges. 

Unlike shares and debentures there is no provision for transfer of your investments in units of mutual funds to any other person while you are alive. So you do not have any option but to redeem the investments of HUF in the units of mutual funds and which will entail capital gains tax in case there is profits. Before amendment of Hindu Succession Act, in 2005 only sons were treated as coparcener of an HUF but after this amendment daughter are treated on par with sons and they are also treated as coparcener. So even after death of your wife, you and your married daughter can continue to have the HUF. As per various judicial pronouncements even in cases where HUF owns assets the HUF can continue with a single coparcener provided there are more than one members of the family. 

For partitioning your HUF you can enter into oral partition of the HUF but for the income tax requires that partition of an HUF has to be full in respect of all the assets and has to be with respect to all the members for it to be recognised under the tax laws. You have to obtain an order recording complete partition of the HUF from the assessing officer and for the assessing officer to arrive at the conclusion that the HUF has been fully partitioned, you need to have a written documents which can be a partition deed or a memorandum recording terms and condition of complete partition of the HUF. The partition deed is generally required to be stamped and registered in case any immovable asset is partitioned under the same.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on twitter.

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