How To Gift Mutual Funds To Children: Rules, Tax Implications And Process Explained
Investment
Gifting mutual funds to children has emerged as an effective way to pass on wealth and build a strong, long-term financial foundation for them. While the process is relatively simple, parents should be aware of the rules, eligibility criteria, and tax implications before making such transfers.
Eligibility Criteria For Gifting Mutual Funds To Children
This facility is available for most mutual fund schemes, except Exchange Traded Funds (ETFs) and solution-oriented schemes such as children’s and retirement funds, which come with specific age-related conditions. Gifting is allowed only for units held in non-demat (Statement of Account or SoA) mode. Transfers involving minor folios, or between minor and major accounts, are not permitted.
In the case of Equity Linked Savings Schemes (ELSS), units can be transferred only after the mandatory three-year lock-in period ends. The recipient (transferee) will not have any lock-in period on these units and cannot claim tax deductions under Section 80C for them.
Process For Gifting Mutual Funds To Children
Unlike assets such as property or gold, mutual fund units cannot be transferred directly without following a specific process. If the units are held in demat form, they can be gifted easily. However, if they are in non-demat form, they must first be converted into demat before transfer.
Both the donor and the recipient must have demat accounts (with depositories like CDSL or NSDL). The transfer can be completed by filling out a Delivery Instruction Slip (DIS) and submitting it to the depository participant (DP), along with the recipient’s account details.
A transaction fee of 0.03 per cent of the transfer value or Rs 25 (whichever is higher), plus 18 per cent GST, is applicable. In addition, a stamp duty of 0.015 per cent is charged on such transfers.
If you wish to invest in mutual funds for a minor child, you can purchase units in the child’s name and act as the guardian. Once the child turns 18, full control of the investment is automatically transferred to them.
Tax Implications Of Gifting Mutual Funds To Children
Gifting mutual funds is governed by provisions under the Income Tax Act. However, gifts to specified relatives, including children, spouse, and siblings, are fully tax-exempt, regardless of the amount.
If mutual fund units are gifted to non-relatives and the total value exceeds Rs 50,000, the entire amount becomes taxable in the hands of the recipient. When the recipient sells the gifted units, capital gains tax will apply. The original cost of acquisition and holding period of the donor will be considered while calculating these gains.
For gifts made to a minor child or spouse, any income or gains generated from the investment will be clubbed with the donor’s income and taxed accordingly. However, if the gift is made to parents, adult children, or siblings, the tax liability will fall on the recipient.
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