Mutual funds have become a popular investment option in India due to their low investment size and potential for wealth creation and diversification. However, when it comes to inheritance, many investors are unsure about the tax implications. If you have inherited mutual funds or are planning your estate, understanding how these funds are taxed is crucial.
No Tax on Inheritance Itself
In India, there is no inheritance tax or estate duty as of now. “The abolition of the Estate Duty Act in 1985 means that when you inherit mutual funds—whether equity, debt, or hybrid—there’s no immediate tax liability on the transfer of these assets from the deceased to the heir. The mutual fund units simply pass on to the legal heir or nominee without any tax being levied at that point,” said Atul Shinghal, Founder and CEO, Scripbox.
“However, taxation comes into play when the heir decides to redeem or sell these inherited mutual fund units. The tax liability depends on the type of mutual fund, the holding period, and the applicable capital gains tax rules,” he added.
Cost of Acquisition and Holding Period
When mutual funds are inherited, two critical factors determine the tax on their eventual sale:
Cost of acquisition: For tax purposes, the cost of acquisition of the inherited mutual funds is taken as the original purchase price paid by the deceased (the original investor). This is outlined under Section 49(1) of the Income Tax Act. In simpler terms, the heir steps into the shoes of the deceased, inheriting not just the units but also their original cost basis.
Holding period: The holding period for calculating whether the gains are short-term or long-term starts from the date the original investor (deceased) purchased the mutual fund units, not the date of inheritance. This can work in favour of the heir, especially if the mutual funds were held for a long time by the deceased, potentially qualifying them for long-term capital gains tax benefits.
Taxation on Redemption of Inherited Mutual Funds
When the heir redeems or sells the inherited mutual fund units, the profits are subject to capital gains tax. The tax treatment depends on the type of mutual fund and the duration for which the units were held.
Equity Mutual Funds
Short-Term Capital Gains (STCG): If the units are sold within 12 months of the original purchase date, the gains are taxed at 20% (plus applicable surcharge and cess) under Section 111A.
Long-Term Capital Gains (LTCG): If the units are held for over 12 months, LTCG up to ₹1.25 lakh per financial year is exempt from tax. Gains exceeding ₹1.25 lakh are taxed at 12.50% (plus surcharge and cess) without indexation benefits, as per Section 112A.
Debt Mutual Funds
If the deceased investor purchased debt-oriented funds after 1 April 2023, they no longer qualify for long-term capital gains. Gains from these debt mutual funds, irrespective of the holding period, are now taxed at the investor’s slab rate. This also applies to inherited debt funds, with the holding period calculated from the original purchase date.
If the deceased investor purchased debt-oriented funds before 1 April 2023, the heir must hold them for two years from the date of acquisition by the deceased investor to qualify for long-term capital gains. Long-term capital gains from these debt mutual funds are taxed at 12.50% (plus applicable surcharge and cess).
Tax Implications for Nominees and Legal Heirs
Nominee vs. Legal Heir: If a nominee receives the mutual fund units, they act as a trustee until the legal heir is determined (as per a will or succession laws). “The tax implications remain the same regardless of whether the units are transferred to a nominee or directly to the heir,” says Shinghal.
Joint Holders: If the mutual fund was held jointly with a right of survivorship, the units automatically transfer to the surviving holder upon the death of one holder, and the same cost and holding period rules apply.
Exemptions and Deductions
The ₹1.25 lakh LTCG exemption for equity mutual funds is available to the heir annually, provided the gains qualify as long-term.
No deductions under Section 80C or other sections are available specifically for inherited mutual funds unless the heir reinvests the proceeds into eligible instruments.
Shinghal explained it with an example:
Let’s say Mr A purchased 10,000 units of an equity mutual fund in January 2020 at ₹100 per unit (total cost: ₹10 lakh). He passed away in January 2025, and his daughter, Ms B, inherited the units. The units were worth ₹200 each at the time of inheritance (market value: ₹20 lakh). Ms B sold them in June 2025 for ₹25 lakh.
Cost of Acquisition: ₹10 lakh (original cost to Mr A).
Holding Period: January 2020 to June 2025 (>12 months), so LTCG applies.
Capital Gain: ₹25 lakh – ₹10 lakh = ₹15 lakh.
Taxable Gain: ₹15 lakh – ₹1.25 lakh exemption = ₹13,75,000.
Tax: 12.50% of ₹13,75,000 = ₹1,71,875 (plus surcharge and cess).
Key Takeaways
Inherited mutual funds are not taxed at the time of inheritance in India.
Taxation arises only when the heir sells the units, based on the original cost and holding period.
Equity funds enjoy LTCG benefits, while debt funds are taxed at slab rates post-2023 changes.
Proper documentation (e.g., death certificate, will, or succession certificate) is essential for a smooth transfer and to establish the cost basis.
Understanding these rules can help heirs make informed decisions about holding or redeeming inherited mutual funds. However, legal heirs must consult a tax professional to navigate complex cases or changes in tax laws beyond March 2025.