How to transfer MF units
The first step is ensuring that the mutual fund units are in dematerialised (demat) form. If they are still in physical form, they must be converted by submitting a Conversion Request Form (CRF) through a Depository Participant (DP).
Once in demat mode, the units can be gifted through both offline and online methods. Offline transfers require investors to fill out a Delivery Instruction Slip (DIS) with the recipient’s demat details and submit it to the DP. Alternatively, online transfers can be done by logging into the demat account, selecting the units to transfer, entering the recipient’s details, and confirming the request.
Jha pointed out that the process is quite user-friendly: “The process of gifting demat units is straightforward. It can be done offline via a Delivery Instruction Slip provided to the Depository Participant or digitally through an online transfer option in your demat account.”
Costs and compliance
Like most financial transactions, gifting MF units involves some charges. The transaction fee is either 0.03% of the transfer value or Rs 25, whichever is higher, plus GST. A stamp duty of 0.015% is also applicable.
Industry body AMFI clarifies that transfers are valid between demat accounts held under either CDSL or NSDL. This ensures uniformity and compliance across platforms.
What about non-Demat units?
For those still holding units in non-demat or SOA form, gifting is not permitted during one’s lifetime. Regulators have imposed this restriction to curb misuse and promote transparency.
However, in the event of an investor’s death, units can be passed on through transmission. If a co-holder exists, the units transfer automatically. Otherwise, they are passed to the nominee or legal heir after submission of documents such as the death certificate, KYC, and bank details.
Gifting to children and family
MF units can also be purchased in the name of a minor child, with a parent or guardian managing the account. Once the child turns 18, they gain full control of the investment.
This is a popular option for families aiming to build a financial corpus for children’s education or long-term needs. Jha highlighted this as a proactive approach to wealth transfer: “For individuals looking to plan wealth transfer within the family or build a corpus for children and relatives, demat holdings offer a streamlined and compliant route for gifting.”
Tax rules to remember
The Income Tax Act governs how MF unit gifts are treated.
Tax-free gifts: Transfers to relatives spouse, children, parents, or siblings are exempt from tax regardless of the amount.
Taxable gifts: Transfers to non-relatives above Rs. 50,000 in value are treated as taxable income for the recipient.
Capital gains: When the recipient eventually sells the units, they are liable for capital gains tax. Importantly, the donor’s purchase cost and holding period are carried forward to the recipient, determining whether the gains are short- or long-term.
A clubbing provision also applies. If units are gifted to a spouse or minor child, any income or gains are taxed in the donor’s hands. In cases where gifts are made to adult children, siblings, or parents, the gains are taxed in the recipient’s hands.
What’s more
While the rules may appear complex at first, gifting mutual fund units offers a way to transfer wealth thoughtfully and compliantly. Demat holdings ensure smooth execution and provide transparency in ownership.
As Jha summed up: “It’s a proactive way to ensure your investments are put to work for your loved ones, without the complexities of liquidating assets or facing tax hurdles. The key takeaway is, if gifting is part of your wealth strategy, ensure your mutual fund investments are maintained in demat form for maximum flexibility.”