Passing on mutual funds? How investors can gift units without cashing out

Gifting mutual funds explained: Investors can transfer units to family or others without selling, but tax rules, paperwork and eligibility matter

Gifting mutual fund units does not always require an investor to redeem the investment and hand over cash to the recipient.

 

Investors can transfer existing mutual fund units directly to another person, but the process is not as straightforward as gifting shares or making a bank transfer.

 

For families looking to pass on investments to children, relatives or loved ones, transferring mutual fund units can help avoid disturbing a long-term investment strategy. However, investors need to understand the documentation, tax implications and operational process before making the transfer.

 

Mutual fund units can be gifted through transfer of ownership

 

A mutual fund investor can gift units by transferring ownership of the units from their folio to another person’s name. The units themselves move to the recipient, while the investment remains intact.

 

 

For example, if a parent holds 1,000 units of an equity mutual fund and wants to gift them to their child, the parent does not need to sell the units. Instead, the units can be transferred to the child’s mutual fund account.

 

The recipient becomes the new owner of those units and will be responsible for future taxation when they eventually redeem them.

 

However, not all mutual fund platforms allow a simple online transfer. In most cases, the process involves submitting physical forms and supporting documents.

 

What is the process to gift mutual fund units?

 

The investor generally needs to follow these steps:

 

1. Ensure the recipient has a mutual fund account

 

The person receiving the gift must have a mutual fund folio with the required KYC (know your customer) compliance completed.

 

If the recipient does not have an existing folio, a new one may need to be created before the transfer.

 

2. Submit a transfer request

 

The donor (existing investor) needs to submit a mutual fund unit transfer form with the asset management company (AMC) or registrar and transfer agent (RTA), such as CAMS or KFin Technologies.

 

The form usually requires details such as:

 

•      Donor’s folio number

 

•      Recipient’s folio details

 

•      Number of units to be transferred

 

•      Reason for transfer (gift)

 

•      Signatures of both parties

 

The AMC may also ask for identity and relationship-related documents depending on the case.

 

3. Transfer is processed after verification

 

Once the documents are verified, the units are moved from the donor’s folio to the recipient’s folio.

 

The market value of the units is not paid out during this process. The investment continues under the new owner’s name.

 

Is gifting mutual fund units taxable?

 

The tax treatment depends on the relationship between the donor and recipient and the value of the gift.

 

Under income tax rules, gifts received from certain relatives are generally exempt from tax. Relatives covered under the Income Tax Act include spouse, parents, children and siblings, among others.

 

However, if mutual fund units are gifted to a non-relative and the value of the gift exceeds the prescribed threshold, the recipient may have tax implications.

 

The bigger point for mutual fund investors is that gifting does not erase taxation. The tax liability usually arises when the recipient sells the units.

 

For capital gains calculation, the recipient generally inherits the original purchase cost and holding period of the donor. This means if the donor had bought units several years ago, the recipient’s eventual capital gains calculation will consider that earlier purchase history.

 

Gifting versus redeeming and giving cash

 

Many investors consider selling their mutual funds and gifting the money instead. But this can have consequences.

 

Redeeming units may trigger capital gains tax if the investment has appreciated. It can also interrupt long-term compounding, especially in equity mutual funds meant for wealth creation over several years.

 

Direct transfer of units can be useful when the intention is to pass on an existing investment rather than exit from it.

 

For example, a grandparent wanting to create long-term wealth for a grandchild may prefer transferring units instead of selling investments and transferring cash, provided the recipient is able to manage the investment.

 

Things investors should keep in mind before gifting

 

While gifting mutual fund units is possible, investors should check a few points:

 

•      Lock-in restrictions: Units under schemes such as equity-linked savings scheme (ELSS) mutual fund may have restrictions because of the mandatory lock-in period.

 

•      Joint holdings: If the folio has multiple holders, all required holders may need to provide consent.

 

•      Record keeping: Maintain transfer forms, acknowledgement receipts and valuation details for future tax records.

 

•      Recipient’s financial planning: The recipient should understand the investment before accepting ownership.

 

Mutual fund gifting can be a practical way to transfer wealth within a family without disturbing investments. But since ownership, taxation and documentation are involved, investors should complete the process carefully rather than treating it like a simple money transfer.