Gifting mutual funds to children: Rules tightened - see what’s allowed, what’s restricted, when tax applies

Gifting mutual fund (MF) units may seem like a thoughtful way to express affection, but the process is far more complex than gifting cash, jewellery or property. MF units are considered capital assets, governed by strict tax and transfer rules. Investors often assume these units can be gifted freely, but that is not the case. According to CA Dr. Suresh Surana, mutual fund gifting involves several legal, tax and procedural considerations—especially when units are held in statement-of-account (SoA) form rather than demat mode.

Dr. Surana explains that mutual fund units are treated as capital assets under Section 2(14) of the Income-tax Act, 1961. Normally, transferring a capital asset triggers capital gains tax since it qualifies as a “transfer” under Section 2(47). However, he clarifies that gifting MFs does not generate capital gains tax for the donor. “Under Section 47(iii), a transfer under a gift, will or irrevocable trust is specifically excluded from the definition of transfer. Therefore, no capital gains tax is computed in the hands of the donor,” he says.

But the tax responsibility shifts later. “When the recipient eventually redeems the units, capital gains tax applies at that stage, based on the donor’s original cost of acquisition and holding period,” Dr. Surana notes.

Gifting MF units held in Statement-of-Account form

For units held in non-demat format, gifting is far more restrictive. Mutual funds typically do not allow inter-investor transfers, except in specific circumstances permitted under AMFI guidelines. Dr. Surana points to AMFI’s Best Practices Guidelines Circular dated August 14, 2024, which allows only limited online transfers for SoA holders. These include situations where:

A surviving joint holder wants to add new joint holders after the death of an existing holder.

A nominee wants to move units to legal heirs after receiving them through transmission.

A minor turning major wishes to add a parent or guardian as a joint holder.

“These are exceptional scenarios. Regular gifting of MF units in SoA form is not permitted,” Dr. Surana emphasizes.

How to gift mutual funds: Convert to demat first

Unlike property or gold, mutual funds cannot be freely transferred unless they are held in demat mode. Investors must first convert MF units from SoA to demat form before gifting them. This can be done either offline—by submitting a Conversion Request Form (CRF) to the depository participant—or online through the investor’s demat portal.

Once units are in demat mode, gifting is straightforward. “Mutual fund units in dematerialized form are freely transferable,” Dr. Surana confirms. Investors simply need to fill out a Delivery Instruction Slip (DIS) and provide the recipient’s demat details. Transfers attract a fee of 0.03% of value or ₹25, whichever is higher, plus 18% GST, along with a 0.015% stamp duty.

Parents wishing to gift units to a minor child may also invest directly in the child’s name, with themselves as guardians. “Once the child turns 18, full control of the investments shifts to them,” Dr. Surana adds.

Non-demat MF units: No gifting allowed

For units held in physical/SoA form, gifting is largely prohibited except in the event of the investor’s death. Regulators restrict transfers to prevent misuse, including money laundering and tax evasion. Since mutual funds can be easily sold and repurchased, free transferability is not considered necessary.

Transfer after the investor’s demise

If an investor passes away, MF units are transferred through a process known as transmission.

If there is a joint holder, units pass automatically to the surviving holder.

Otherwise, the nominee or legal heir can claim the units by submitting documents, including the death certificate, KYC details, bank information, and, where required, an indemnity bond.

Dr. Surana notes that nomination is now mandatory for MF investments. Where no nominee is specified, investors must file a written declaration.

As Dr. Surana sums it up: “Gifting mutual funds is entirely possible but only through the right channels. Investors must understand the procedural and tax implications to avoid compliance issues.”