Gifting mutual funds made easy: How to transfer units in non-demat mode

Learning non-demat mode transfers

While the majority of mutual fund investments are in the demat mode by investors via their broker, units may be held in a non-demat or “statement of account” mode with the Asset Management Company (AMC) or Registrar and Transfer Agent (RTA) directly. It is a favourite among traditional investors who prefer having direct communication with mutual fund houses. If you want to transfer or gift mutual fund units without a demat account, the process is still within the law, but it involves a couple of extra steps.

Procedure for gifting or transferring units

For initiating a transfer in non-demat mode, the unit holder must provide a duly signed transfer request form or letter to the AMC or its RTA, accompanied by the folio number, scheme details, and number of units to be transferred. The recipient’s details, such as PAN, KYC compliance, and bank details, must be provided. Some AMCs may request the transferor and transferee to undergo physical verification or provide notarized papers. The units are thereafter shifted to the beneficiary’s folio when cleared, and both parties are intimated through a statement of account.

Tax effects of gifting mutual fund units

Gifting mutual fund units is permissible but has tax effects for which giver and receiver should be informed. Pursuant to Indian tax laws, gifts to relatives such as spouse, children, parents, or siblings are not charged with tax, but gifts to individuals other than relatives exceeding ₹50,000 during one fiscal year are taxed on the recipient as “income from other sources.” If the recipient then redeems the units later, capital gains tax would be levied at the initial purchase price and the period of holding and not from the date of transfer.

Advantages of non-demat transfers

Non-demat unit transfers allow the investor’s choice of not linking holdings with brokers or trading accounts. It also serves as an easy way to transfer investment ownership to relatives, especially in the context of succession planning or estate planning. Furthermore, gifting mutual fund units ingrains a culture of prudent investment in the recipient, and he/she benefits from the compounding of returns without having to begin from the start. The process also eliminates brokerage-related charges that can be incurred in a demat transfer.

Things to note before transferring

Before making a transfer, be sure that both the recipients are KYC-compliant and that the recipient either has an existing folio with the AMC or is willing to create one. Investors also need to ensure that the scheme allows transfer of units, since some close-ended schemes or tax-saving schemes (ELSS) do not allow transfers until the lock-in period is over. Finally, keeping accurate documentation for the transfer is vital in order to avoid conflicts or questions regarding taxes in the future.

FAQs

1. Can I transfer units of ELSS to someone else?

No, ELSS units cannot be transferred until three years from the date of its purchase.

2. Will the recipient be taxed on received mutual fund units?

Yes, if the recipient is not a relative and the gift is more than ₹50,000 in a year, it will be taxed. In the case of relatives, there is no tax on gifts, but capital gains tax is applicable on redemption.

3. Are demat accounts necessary for both the parties to transfer mutual fund units?

No, non-demat mode transfers are done directly through the AMC or RTA without using demat accounts.