Gifting mutual funds: How does it work and how can you transmit them to legal heirs

Gifting mutual fund (MF) units to your loved ones is a great way of showing your affection. But gifting MFs does not work like other assets such as land, buildings, jewellery and cash. You have to follow clearly laid down procedures specified by the regulators. Here is a guide on how MFs can be gifted and the tax implications for the donor and the receiver.

How can you transfer your MF units to a demat account?

Unlike gifting assets such as property and gold, MFs cannot be transferred easily. If you have a demat account, you can gift your MF units to your loved ones by following some simple steps. If the MF units are not held in a demat account, they have to be converted into a demat form as only after this they can be transferred to the beneficiary.

You have to first move your MF units to your demat account if you intend to gift them to your spouse, children, siblings or loved ones. Here are the steps to transfer your MF units to your demat account and then to the receiver of the gift. This can be done through offline or online mode.

Offline method:

1. Get a Conversion Request Form (CRF) from your depository participant (DP).
2. Fill out the CRF with your details and information about MF units.
3. Submit the form and your MF account statement to your DP.
4. The DP will process the transfer with the fund’s registrar.

Online method:

1. Log into your demat account online.
2. Go to the mutual funds section and select the transfer option.
3. Choose the fund and number of units to transfer.
4. Select your demat account as the destination.
5. Review and submit the request.

Gifting MF units through demat accounts

Currently, mutual fund units held in dematerialized (demat) mode are freely transferable, according to the Association of Mutual Funds in India (AMFI). So, you can gift MF units to your loved one if she/he also has a demat account (either with CDSL or NDSL, the depository participants or DP).

All you have to do is fill up a ‘Delivery Instruction Slip’ (DIS), which is an instruction to transfer your MF units to another demat account, and submit it to your DP. You have to provide all the relevant information including the receiver’s demat account details.

A transaction fee of 0.03% of the transfer value or ₹25 whichever is higher plus a GST of 18% is levied for transferring MF units from one demat account to another. Additionally, a stamp duty of 0.015% is applicable for all transfers. If you want to gift MF units to your minor daughter or son on her/his birthday, then you can buy units in your child’s name and you can be the guardian. But once the children reach the age of 18, they will gain full control of the investments as it will officially become their money.

How about MF units in non-demat form?

If MF units are held in a non-demat form, they cannot be directly transferred to another person except in the case of the investor’s death. Regulators have framed stringent rules as transfer of mutual funds involves changing ownership or control from one investor to another.

The restrictions on transferring mutual funds have been put in place to protect investors and maintain market integrity. If free transfers are allowed, it could potentially lead to misuse, such as money laundering or tax evasion. Further, MFs are designed to be easily bought and sold in the open market negating the need for direct transfers as units can be easily sold and repurchased.

Transferring mutual funds after the demise of an investor

In case of the primary investor’s death, MF units are transferred through a process called transmission. Here is how transmission of MF units happens.

If there is a co-applicant for the investment: Units are automatically transferred to the co-applicant.

Without a co-applicant: MF units are transferred to the nominee or legal heir, after all relevant documents including the death certificate are submitted. You have to provide these documents and information to get the transfer done.

• Death certificate of the deceased
• KYC details of the nominee or legal heir
• New bank account details
• Indemnity bond (for large amounts)

Specific requirements could vary depending on the mutual fund house and the number of unit holders. Moreover, nominating a beneficiary is now mandatory for mutual fund investments. If a nominee is not specified, investors must submit a written declaration about the same.

Tax implications of gifting MFs

Gifting MF units is taxable under the ‘Income Tax Act’. But there are exemptions. Gifts from relatives (spouse, children and siblings) are fully exempt irrespective of the amount involved. If MF units are gifted to non-relatives and if the value of such a gift exceeds ₹50000, the entire amount is taxable at the hands of the receiver.

If the recipient sells the gifted MF units later, it will attract capital gains tax. The cost and holding period of the donor will also be considered for capital gains tax. Any income or gains generated from MF units gifted to a minor child or spouse will be taxed in the hands of the donor. But if the gift is given to parents, adult children and siblings, then it will be taxed in their hands.

Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.