Gift or transfer mutual fund units in non-demat mode; here’s how

Mutual Fund (MF) investors can now gift/transfer units held in the non-demat mode, i.e., units held in the statement of accounts (SoA) form. The facility can be availed across all mutual fund schemes except ETFs (Exchange Traded Funds), according to a recent directive by markets regulator SEBI.

This online-only initiative is designed to simplify the transfer process while minimizing the risk of fraudulent transfers, according to CAMS. Here is a guide on gifting/transferring MF units held in SoA form.

Who can transfer mutual fund units?

This facility is available only to individual investors under the Resident/Non-Resident Individual category. Transfers are permitted under the following scenarios.

Minor to major: A minor unit holder who has turned into a major unit holder and can add a parent, guardian, sibling, spouse, etc., as a joint holder to the folio.

Surviving joint holder: Upon the demise of a joint holder, a surviving unit holder can add new joint holders.

Nominee to legal heir: A nominee of a deceased unitholder can transfer units to legal heirs of the deceased unitholder, post the transmission of units in the name of the nominee.

Transfer to siblings: Mutual fund units can be transferred between siblings.

Gifting of units: Investors can gift mutual fund units to family members or third parties.

Transfer of units to third-party: Mutual fund units can be transferred to any third party.

Addition/deletion of unit holder: Investors can add or remove joint holders from the folio as required.

To ensure security and prevent misappropriation, a cooling period of 10 days will apply between the date of transfer and the date of redemption. The facility for transfer of units held in SoA mode is available under all MF schemes, except ETFs.

Partial transfer of units held in a folio is also allowed. However, if the balance units in the transferor’s folio fall below the specified threshold /minimum number of units as specified in the SID (Scheme Information Document), such residual units shall be compulsorily redeemed, and the redemption amount will be paid to the transferor.

If the request for transfer of units is lodged on the record date, the dividend payout/ reinvestment shall be made to the transferor. To mitigate the risk, redemption under the transferred units shall not be allowed for 10 days from the date of transfer. This will enable the investor to revert in case the transfer is initiated fraudulently.

Earlier, MF units held in a non-demat form were not allowed to be directly transferred to another person except in the case of the investor’s death. Regulators framed stringent rules as the transfer of MF units involves changing ownership or control from one investor to another.

The restrictions on transferring MFs were 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.

Gifting MF units is taxable under the ‘Income Tax Act’. But 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 in 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.

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