The market regulator’s proposal to allow gifting of mutual funds (MF) via a prepaid payment instrument (PPI) can kick off a new way to celebrate significant lifestage moments such as weddings, graduations and birthdays while nudging youngsters to take the MF route to wealth creation. A purpose-locked instrument, it will offer a smarter alternative to cash or store coupons or even jewellery that are the usual gifts on such occasions.
The proposed gift PPI will be non-reloadable, capped at Rs 10,000, and valid for one year. It will be for an initial lump-sum subscription to an MF scheme. However, if the receiver opts for a systematic investment plan (SIP), he would need to register a payment mandate linked to his own bank account for subsequent instalments, as SIPs require a standing payment instruction.
“That first instalment is often all it takes to convert a passive interest in mutual funds into an active investing habit, which is ultimately what this proposal is trying to achieve,” says Sonam Srivastava, founder, Wright Research PMS.
The gifting process
A person can buy a gift PPI from a PPI issuer — banks and NBFCs— either in physical card form or digitally via an electronic bank transfer or UPI payment. Only the recipient’s name would be required. He then hands over the gift PPI card or transfers the online link to the recipient. The recipient then visits the AMC’s website, accepts ownership of the PPI, and uses it to subscribe to a mutual fund scheme.
While the purchaser of the card can suggest a scheme, it will not be binding on the redeemer. The full value of the PPI will have to be deployed which will ensure that the recipient makes a definitive choice rather than leaving funds idle. “It will help the receiver save for the future, minimise emotional spending and introduce a new investment option,” says Sushil Jain, CEO, PersonalCFO.in, a wealth management firm.
Safeguards for onboarding
Before redeeming the gift PPI for an MF subscription, the recipient will have to formally accept legal ownership of the instrument which will be recorded by the PPI issuer. The registrar and transfer agent will receive the identity of the registered PPI owner from the issuer and will check whether that person’s details matches the MF folio owner’s.
If the two identities align, the transaction will proceed. If they do not, it will be rejected and the PPI value will be returned to the issuer’s escrow account. This eliminates any potential avenue for misuse or money laundering. “For the recipient, it establishes clear, documented ownership of the investment right from the first transaction, which matters for any future redemption or capital gains computation,” says Srivastava.
How it will be taxed
If the gift PPI is received from a relative as defined under the Income Tax Act, the amount is fully exempt from tax, regardless of value. If the recipient receives it from a non-relative, and the aggregate value of such gifts in a financial year exceeds Rs 50,000, the excess becomes taxable as income from other sources in the hands of the recipient except when received on the occasion of wedding.
Capital gains tax will apply upon redemption of the investment. Gains beyond Rs 1.25 lakh per year from equity funds held over a year attract 12.5% tax and 20% if held for less than one year. Debt fund gains are taxed at the applicable income tax slab irrespective of holding period.