Diwali special: Gift mutual funds instead of sweets — here’s how and what to know about tax rules

New Delhi (The Uttam Hindu): Diwali is just around the corner, and if you're looking to give your loved ones a gift beyond sweets and clothing that will secure their future, mutual funds can be an excellent option. This is not only a sensible financial gift, but it can also instill an investing habit in your loved ones. The great news is that the requirement for a demat account to give this special gift has now been removed.

You can transfer mutual fund units as a gift directly through the fund house without a trading account. Let's explore the process and tax implications.

How to gift mutual funds (without demat)?

The process of gifting mutual fund units without a demat account is quite simple. First, you need to obtain a 'Transfer Request Form' from the relevant mutual fund company (AMC) or its Registrar of Units (RTA) and fill it out. In this form, you must enter your details, such as your folio number, scheme name, and the number of units you wish to transfer. You must also provide the PAN, KYC, and bank details of the person to whom you are gifting (the receiver). After the necessary verification by the fund house, your request is approved and the units are transferred directly to the receiver's folio, with a confirmation statement sent to both parties.

Understand the tax implications of gifts

Gifting mutual funds is legally valid, but it's crucial to understand the tax implications. According to income tax rules, gifting mutual fund units to your "close relatives" (such as spouse, children, parents, or siblings) is completely tax-free. However, if the gift is given to a friend or other relative and the total value exceeds ₹50,000 in a financial year, the amount will be added to the recipient's income and taxed according to their tax slab. It's also important to note that whenever the receiver sells these units in the future, they will have to pay capital gains tax on the profits earned.

Keep these things in mind:

Certain conditions must be met to ensure a smooth mutual fund gifting process. First, both the giver and the receiver must have complete KYC. Furthermore, the recipient must have a folio number with the fund house (AMC) to whom you are gifting the units; if not, a new folio can be easily opened before the transfer. Finally, it's important to note that not all schemes can be gifted; certain schemes, such as ELSS (tax-saving funds) or closed-ended funds, have a specific lock-in period during which unit transfer is not possible.