Can You Gift Mutual Funds in India? Rules | Taxation

Can you gift mutual funds in India? Discover the legal ways, tax rules, and the best method to gift mutual fund units to your family or friends with ease.

In Indian families, gifting is often a heartfelt tradition. But today, beyond gold or gadgets, people are also looking to gift financial assets, like mutual funds, to their loved ones. A natural question arises—can mutual funds be gifted in India, and if so, what’s the proper way to do it?

Let’s walk through the legal, procedural, and tax-related aspects of gifting mutual funds, based on guidelines from AMFI, SEBI, and IT Department rules and regulations.

Can You Gift Mutual Funds in India?

Yes—but not as freely as you might think. Mutual fund units are not like jewellery or cash, which you can hand over easily. The transfer of mutual fund ownership is regulated, and depends on how the units are held—demat or physical.

As per SEBI and AMFI, mutual fund units:
– Can be transferred as a gift only if held in demat form, via off-market transactions.
– Cannot be transferred if held in non-demat (physical) form—except on death (i.e., transmission).
– Cannot be transferred just by executing a Gift Deed.

1. Best Option: Invest Directly in Recipient’s Name
The simplest way to “gift” mutual funds is by investing directly in the name of your family member.

Example:
You want to gift your daughter a mutual fund. Instead of buying it in your name and trying to transfer it later, you:
– Use her PAN, KYC, and bank details.
– Invest directly into a mutual fund in her name.

For minor children, the investment will be made under their name, with a guardian (parent) managing the account until the child turns 18.

The cleanest approach is to directly invest in your child’s name. However, be aware that once your child turns 18, they gain full control over the investments, as it becomes their money. This means you’ll have no authority over the funds once they reach adulthood. So, it’s important to exercise caution, as their future decisions might not align with your expectations.

According to the clubbing provisions, if you withdraw the investment before your child turns 18, the gains will be taxed under your income, as the investment is still considered part of your financial assets. In the case of gifting mutual funds to a spouse, if the funds come from your earnings, the income generated from the mutual fund will be taxed under your income, not your spouse’s. This is because the source of the income matters for tax purposes.

2. Gifting via Demat Transfer (Off-Market)
If you hold mutual fund units in demat form, and your recipient also has a demat account, you can transfer them via an off-market gift transaction.

Steps:
1. Ensure both donor and recipient have demat accounts (CDSL or NSDL).
2. Submit a Delivery Instruction Slip (DIS) to your Depository Participant.
3. Specify the recipient’s demat details and indicate it’s a gift.

This is the only SEBI-approved method for gifting existing units. Here’s a simple example of an off-market transaction:

Imagine you want to gift some mutual fund units to your brother, who has a demat account. Here’s how an off-market transaction would work:

1. Step 1: You have mutual fund units in your demat account, and your brother also has a demat account.
2. Step 2: You fill out a Delivery Instruction Slip (DIS), which is like an instruction to transfer the units from your demat account to your brother’s demat account. You’ll mention the mutual fund units and his demat account details.
3. Step 3: You submit the DIS to your Depository Participant (DP), which is the financial institution managing your demat account.
4. Step 4: The transfer happens off-market, meaning it’s a private transfer between two parties and does not happen through the stock exchange.
5. Step 5: Your brother now owns the mutual fund units in his demat account, and the transfer is complete.

This is an off-market transaction because the transfer occurs directly between you and your brother, outside of the stock exchange, with the help of a DIS form.

3. Why a Gift Deed Alone Won’t Work

A Gift Deed, though legally valid for movable property, does not serve as a tool to transfer mutual fund units. Mutual funds in physical form are non-transferable, and AMCs or RTAs do not accept gift deeds for ownership change.

You may use a gift deed as a supporting document when doing an off-market transfer via demat, but on its own, it’s not effective.

4. Use a Will for Post-Death Transfer (Transmission)

If your intention is to pass on mutual funds after your death, then a Will is the correct instrument.

Transmission Process:
– Units are transferred to nominee or legal heir after submission of required documents (death certificate, KYC, Will copy, etc.).
– If there’s no nomination, transmission is more complex and may require legal heir certificates or probate.

A nomination ensures quicker access, while a Will provides legal clarity on inheritance.

Do note that nominees by default will not be considered as asset owners. They act like trustees to transfer the assets to the legal heirs.

5. Can You Gift via Online Platforms?

Some fintech platforms like Kuvera or Zerodha Coin allow you to gift mutual funds where:
– You choose a scheme.
– Pay from your bank account.
– The recipient receives a link to accept the gift and complete their KYC.

Units are then directly allotted to the recipient, just like a fresh purchase.

Convenient, but not a “transfer”—it’s a new investment on behalf of someone else.

Income Tax Implications of Gifting Mutual Funds

Here’s where things become critical—especially if you’re gifting to spouse or minor children.

1. Gift Tax – Section 56(2)(x)
– Gifts from relatives (as defined under the Income Tax Act) are fully tax-exempt, regardless of amount.
– Gifts from non-relatives exceeding Rs.50,000 in a year are taxable in the recipient’s hands as “Income from Other Sources”. Who are considered relatives?
– Spouse, parents, children, siblings, lineal ascendants/descendants, etc.

So, if you gift to your spouse or child, there is no gift tax. Refer my earlier post on this “Income Tax on Gift in India – Rules and tips to save tax“.

2. Capital Gains Tax – Who Pays and When?
When the recipient sells the mutual fund units later, capital gains tax will apply. The cost and holding period of the donor (you) will be considered for tax calculation.

Example:
– You bought a mutual fund in 2020, gifted it to your spouse in 2024.
– They sell it in 2026.
– For tax purposes, the investment is considered from 2020, and capital gains will be long-term or short-term accordingly.

3. Clubbing of Income – Section 64
This is extremely important and often overlooked.

If you gift mutual funds to:
– Your spouse, or
– Your minor child (not a disabled child),

Then any income or capital gains generated from that investment is clubbed with your income.

You gift Rs.1 lakh in mutual funds to your wife. She redeems it later with a gain of Rs.10,000. This Rs.10,000 gain will be taxed in your hands, not hers.

Exception:
– Clubbing does not apply if gifted to:
  – Adult children
  – Parents
  – Siblings
  – Disabled minor child
  – Other relatives (as long as not spouse/minor)

Takeaway: Gifting is tax-free, but income arising from it may come back to you under clubbing provisions. So plan accordingly.

Summary: Can Mutual Funds Be Gifted?

Final Thoughts

Mutual fund gifting in India is legally allowed, but comes with conditions:

• Gift mutual funds through direct investment or demat transfer.
• Don’t rely on a Gift Deed to change ownership—it won’t work.
• For legacy planning, always draft a Will and align it with your nominations.
• Understand clubbing rules before gifting to your spouse or minor children, or you may end up paying tax on their gains.

As SEBI-registered financial planners, we often advise clients to gift mindfully—not just for tax-saving, but for long-term wealth-building within the family.