Investor ask: Can mutual funds in SoA form be gifted without capital gains implications?

I would like clarification on the treatment of mutual funds as capital assets and the implications of gifting them. Specifically, are mutual fund units considered capital assets under the Income Tax Act, and if so, can they be gifted without triggering capital gains tax liability for the donor?

Further, I seek to understand the process for gifting mutual fund units that are held in a statement of account (SoA) format rather than in a demat account. Since mutual fund units in SoA form are not directly transferable, and asset management companies typically allow transfer of units only through transmission upon the investor’s death, is there any provision that permits gifting these units during the investor’s lifetime?

If the units must first be redeemed and the proceeds gifted in cash, would that redemption trigger capital gains tax in the donor’s hands? Additionally, how would the cost of acquisition and holding period be treated for the recipient in such a case?

I would appreciate a detailed clarification on the applicable tax rules, procedural requirements, and any exceptions under current SEBI and Income Tax provisions.

Advice by CA Dr Suresh Surana

Yes, units of mutual funds are regarded as capital assets under Section 2(14) of the Income-tax Act, 1961 (hereinafter referred to as ‘the IT Act’). Consequently, any transfer (as defined in Section 2(47)) of such units ordinarily gives rise to a capital gains tax liability in the hands of the transferor.

However, when mutual fund units are gifted (i.e., transferred without consideration) by individuals or HUFs, such a transfer does not trigger capital gains tax for the donor since Section 47(iii), any transfer of a capital asset “under a gift or will or an irrevocable trust” is expressly excluded from the definition of “transfer.” Accordingly, no capital gains are computed in the hands of the person gifting the units. When the recipient (donee) later redeems or sells those units, capital gains tax will apply at that point, considering the original cost of acquisition to the donor, and the original holding period (i.e., including the donor’s holding period).

It is advisable to consult the respective mutual fund managers to check on the transferability of the Mutual Fund units. However, based on general practise we understand that if the investment is maintained in a statement-of-account (SOA) form with the fund house rather than a demat account, mutual funds generally do not permit inter-investor transfers, except in certain cases. In accordance with the AMFI Best Practices Guidelines Circular No.135/BP/116/2024-25 dated August 14, 2024, following ‘Individual Unitholders’ holding units in statement-of-account (SoA) form can also transfer units through online mode via the transaction portals of the RTA and the MF Central:

> Surviving joint unitholder, who wants to add new joint holder(s) in the folio upon demise of one or more joint unitholders (s).

> A nominee of a deceased unitholder, who wants to transfer the units to the legal heirs of the deceased unitholder, post the transmission of units in the name of the nominee.

> A minor unitholder who has turned a major and has changed his/her status from minor to major, wants to add the name of the parent/guardian, sibling, spouse, etc. in the folio as joint holder(s).

In conclusion, while mutual fund units are indeed treated as capital assets under the Income Tax Act, gifting them does not attract capital gains tax for the donor, owing to the exemption under Section 47(iii). However, the donee assumes both the donor’s cost of acquisition and holding period when eventually redeeming or selling the units, which determines future tax liability. Practically, though, the ability to gift mutual fund units held in Statement of Account (SoA) form remains limited, as most fund houses and RTAs permit transfers only under specific scenarios such as transmission on death or status change of the holder. Therefore, investors intending to gift mutual fund units should carefully evaluate whether their folio structure and mode of holding permit such transfers. Consulting with both the fund house and a qualified tax advisor is advisable to ensure compliance with SEBI, AMFI, and Income Tax regulations while avoiding unintended tax consequences.