After the 2005 amendment to the Hindu Succession Act, daughters, married or unmarried, became equal coparceners in a Hindu Undivided Family (HUF). A coparcener is an HUF member with a birthright to ancestral property and the power to demand its partition. Today's Ask Wallet Wise query decodes how HUF assets can be divided under income tax laws.
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My HUF now consists of me, my wife, and an unmarried son, as my daughter was married in 2020. I wish to distribute some of the assets among the three members. Can I do it and what are the tax implications for the assets received by the members?
Expert's View: After the amendment of the Hindu Succession Act in 2005, a daughter, whether married or unmarried, is treated at par with a son and is also a coparcener. She remains a coparcener even after marriage. So, your HUF now consists of four members, not three, as she is still part of the HUF being a coparcener.
A daughter, being a coparcener, is entitled to an equal share in the HUF assets when the HUF is partitioned or its assets distributed. Upon partition the daughter receives a share equal to that of the son. The mother and father will also receive shares equal to those of the son and daughter. It may be noted that any member including a daughter can relinquish his or her share in favour of other members.
Before the amendment of Section 171 of the Income Tax Act in 1978, an HUF could be partially partitioned either among some of its members or with respect to certain assets. However, after the amendment a partial partition is not recognised under the Income Tax Act. A partition of an HUF is valid under income tax laws only if it is a complete partition both in terms of all assets and all members.
To make the partition fully effective for income tax purposes, you must apply to the Assessing Officer for an order recognising such total partition.
The assets received by members upon a full partition of the HUF are completely tax-free in their hands under Section 10(2) of the Income Tax Act. This distribution is not treated as a transfer under tax laws, so there is no capital gains tax liability for the HUF on such assets.
Since you plan to distribute only some of the HUF’s assets it will be treated as a partial partition, which is not recognised under tax laws. Therefore, any income arising from the distributed assets will continue to be taxed in the hands of the HUF even if the income is actually received by the individual member. This clubbing will continue until a full partition takes place.
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