How to Gift Mutual Funds Easily: Step-by-Step Guide for Indian Investors

I still remember a conversation with a long-time client, let’s call him Anil Verma, a 55-year-old senior executive in Gurugram.

Anil walked into my office with a familiar mix of pride and confusion on his face.

“Taresh, I’ve built a decent mutual fund portfolio over the last 15 years. Now I want to gift part of it to my daughter before she goes to the US for her master’s. But everyone is telling me I’ll have to sell, pay capital gains tax, then reinvest in her name. Isn’t there a smarter way?”

For years, this was the pain point for many Indian families. The intent was simple:

“I want my child / spouse / parent to benefit from my funds.”

But the process was messy – especially for units held in Statement of Account (SoA) form. You often had to redeem, trigger capital gains, then reinvest. The spirit of “gift” got lost in paperwork and tax calculations.

Recently, SEBI quietly fixed a large part of this problem.

A regulatory tweak now allows transfer of even SoA-based mutual fund units, not just demat units, for purposes like gifting, inheritance and changing joint holders. This removes the biggest hurdle that earlier forced families to redeem and pay tax even when they simply wanted to pass units within the family.

In this article, I’ll walk you through:

• What exactly has changed

• When gifting mutual funds makes sense (and when it doesn’t)

• The step-by-step process for gifting via demat and via SoA / MF Central

• Tax rules, clubbing provisions and common mistakes to avoid

• Real-life style anecdotes from Indian families who are already using this route

All in my usual, I present a lots of stories, simple language, and practical action steps.

1. What Has SEBI Actually Changed?

Let’s start with the big picture.

Earlier:

• Only demat-held MF units were freely transferable like shares.

• If your units were in SoA mode (normal folio with the RTA / AMC), gifting or transferring was practically not possible. Inheritance was clunky; many families had to redeem and reinvest, triggering capital gains.

Now, with the new framework:

• Both demat and SoA units can be transferred for:

• Gifting to family members

• Succession / inheritance

• Adding/removing joint holders (e.g., when a minor becomes a major)

• The SoA transfer is done digitally through RTAs’ portals and MF Central with an OTP-based workflow.

In short, SEBI has said:

“Why should only demat investors enjoy the ease of transferring units? Let’s open it for traditional folio holders as well.”

For millions of Indian families, this is a game changer for both tax planning and legacy planning.

2. Why Gifting Mutual Funds Is So Powerful

When we think of gifting in India, we still imagine:

• Gold coins at Diwali

• Envelopes of cash at weddings

• Maybe a fixed deposit in the child’s name

Mutual funds rarely make it to the “gift list”.

But think about what you actually want your gift to do:

• Grow in value with time

• Be transparent and easy to track

• Be flexible – can be redeemed when needed

• Support a purpose – education, down payment, retirement, financial security

Mutual funds tick all these boxes.

I have seen:

• Parents gifting SIPs to their children on every birthday

• Grandparents moving some of their balanced funds to grandchildren as long-term gifts

• Spouses gifting each other funds earmarked as “retirement for both of us”

Earlier, the only practical way was: redeem → pay capital gains → transfer cash → reinvest. Now, in many cases, we can just move the units directly.

And in specific situations, this can even lead to lower overall tax for the family.

Example: Using Different Tax Slabs Within a Family

SEBI’s move has opened a neat planning opportunity that tax experts have already highlighted:

• Suppose you, the parent, are in the 30% slab.

• Your adult daughter has just started freelancing and has no taxable income this year.

• You hold a debt mutual fund with significant gains.

Instead of redeeming in your own name and paying tax, you can:

1. Transfer some units to her as a gift.

2. She redeems them when she needs money.

3. The capital gain is now taxed in her hands. For someone whose income remains within the Section 87A rebate limit, the effective tax could be very low or even zero depending on the regime and total income.

You are not “avoiding” tax illegally. You are simply shifting the tax incidence within the family – a concept fully recognised in Indian tax law, as long as you respect clubbing rules and documentation.

We’ll come back to tax; first, let’s get the mechanics clear.

3. The Legal & Tax Basics of Gifting Mutual Funds

Before you click any “Transfer” button, you must understand three pillars:

1. Capital gains in the hands of the donor

2. Gift income in the hands of the recipient

3. Clubbing provisions (when gains come back to you)

3.1 Capital Gains for the Donor

When you gift an asset to a relative without consideration (i.e., free), it is not treated as a “transfer” for capital gains under Section 47(iii) of the Income-tax Act.

So, if you gift mutual fund units to your spouse, children, parents, siblings etc., you do not pay capital gains tax at the time of gifting.

Capital gains arise only when the recipient eventually sells those units.

3.2 Tax for the Recipient (Gift Tax)

Under Section 56(2)(x):

• Gifts received from “relatives” (as defined in the law: spouse, parents, children, siblings, lineal ascendants/descendants, etc.) are fully exempt, regardless of amount.

• Gifts from non-relatives are taxable as “Income from Other Sources” if the total value of such gifts exceeds ₹50,000 in a year.

So if you gift mutual fund units worth ₹5 lakh to your adult son, there is no gift tax in his hands.

But if you gift units worth ₹1 lakh to a close friend, the value may be taxable for them as income (unless it is a wedding gift or another specific exemption).

3.3 Capital Gains When the Recipient Redeems

When the recipient finally sells the gifted units:

• They inherit your original purchase cost and original purchase date.

• Their capital gain is computed as:

Sale Price – Your Original Cost.

• Holding period (to decide between long-term and short-term) is also counted from your purchase date, not the gift date.

This is crucial when planning long-term equity or debt fund gifts.

3.4 Clubbing Rules – The Big Trap

If you gift mutual fund units to:

• Your spouse, or

• Your minor child

then any income (including capital gains) from those assets is clubbed back into your own income for tax purposes, except for a small exemption of ₹1,500 per minor child per year.

So, gifting to spouse/minor child is emotional planning, not tax saving planning.

4. Two Routes to Gift Mutual Funds – Demat and SoA

Let’s now convert all this into a clear checklist.

You can hold mutual funds in two broad ways:

1. Demat form – units appear in your demat account along with shares.

2. SoA / Folio form – traditional mutual fund folio maintained by the AMC / RTA (CAMS, KFin, etc.).

The process of gifting depends on which bucket you’re in.

4.1 Route A – Gifting Mutual Funds Held in Demat Form

This route has existed for some time and is quite straightforward.

Pre-requisites

• Both you (donor) and the recipient must have demat accounts, KYC-compliant and active.

• The recipient’s PAN, bank and mobile/email should be updated.

Step 1: Check the ISIN and Units

• Each mutual fund scheme and plan has a unique ISIN (like a code).

• Log into your demat account or check your statement to identify:

• ISIN of the scheme

• Number of units you wish to gift

Step 2: Choose Transfer Method

You can:

• Use a Delivery Instruction Slip (DIS) – an offline form where you write the recipient’s demat details and number of units.

• Or use online off-market transfer through your broker / CDSL’s EASIEST platform – often faster and OTP-based.

In both cases, select “Gift” or “Off-market transfer” as the reason.

Step 3: Authorise & Pay Charges

• Confirm the transaction with your PIN / OTP.

• Charges usually include:

• Transaction fee: 0.03% of transfer value or ₹25 (whichever is higher) plus 18% GST.

• Stamp duty: 0.015% on transfer value.

For most family gifts, these charges are negligible compared to the potential tax savings and convenience.

Step 4: Recipient Confirms Credit

Within a couple of working days, units show up in the recipient’s demat account.

I ask my clients to:

• Download a demat statement showing the transfer

• Attach it to a simple gift deed as documentation

That’s it – demat gifting done.

4.2 Route B – Gifting Mutual Funds Held in SoA (Non-Demat) Form

This is where SEBI’s new rules are most powerful.

Earlier, SoA units were practically stuck – you couldn’t freely transfer them. Now, RTAs and MF Central provide a digital transfer facility for SoA holdings (except ETFs and some special solution-oriented schemes).

Pre-requisites

1. You must be the rightful unit holder (including completion of:

• Transmission in case of death of a previous holder, or

• Status change from minor to major, where applicable).

2. The recipient must:

• Have an existing folio with the same AMC / RTA or open a zero-balance folio online.

• Be fully compliant with:

• KYC

• Bank account validation

• FATCA

• Nomination, email and mobile details.

Step-by-Step Process

Step 1: Login to RTA Portal or MF Central

• Visit CAMS / KFintech / MF Central and log in with PAN + OTP.

• Choose the menu option like “Transfer of Units (SoA mode)”.

Step 2: Select Transferor Folio

• Enter the folio number from which units are to be gifted.

• System verifies your KYC and eligibility in real time.

Step 3: Enter Transferee (Recipient) Details

• Select the recipient’s existing folio (if any) or enter their PAN / folio details.

• The system ensures both folios are valid and compliant.

Step 4: Choose Scheme and Units

• Pick the scheme(s) and number of units (full or partial transfer).

• Note: If the request is raised on the record date, dividend (IDCW) will go to you, the transferor.

Step 5: Pay Stamp Duty Online

• The portal computes stamp duty based on latest NAV.

• You pay digitally from your registered bank account.

Step 6: OTP Confirmation

• You receive an OTP on registered mobile/email.

• Enter it to authorise the transfer.

Step 7: Wait for Completion & Lock-In

• Transfer must be completed within two working days (SEBI mandate).

• For security, redemption of the transferred units is blocked for 10 days so that any fraudulent transfer can be reversed.

Once complete, the recipient can see units in their folio and redeem / switch after the lock-in period.

5. Three Real-Life-Style Scenarios (Names Changed)

5.1 The “Daughter Going Abroad” Gift

Anil, whom I mentioned earlier, eventually gifted part of his short-term debt fund to his adult daughter, Rhea.

• Units were in SoA mode across two AMCs.

• We first ensured Rhea completed KYC and opened zero-balance folios.

• Anil used MF Central to transfer units worth around ₹8 lakh.

• Rhea redeemed them in tranches as her living expenses abroad came up.

Because her taxable income in India was almost nil, her overall tax on these redemptions was far lower than what Anil would have paid in the 30% slab.

The emotional satisfaction?

“Papa didn’t just transfer money; he transferred the fund itself – and I could see how it grew before I used it,” she told me on a Zoom call.

5.2 The Widowed Mother & Two Sons

Another case involved an 80-year-old widow, Shanta Devi, with scattered MF holdings from her late husband.

Instead of making the sons redeem after her lifetime and pay tax in a hurry, we:

• Consolidated all SoA units into a few key schemes.

• Used the new SoA transfer facility to gift part of the units now, equally to both sons.

• Updated her will to clearly mention who gets the remaining units.

Emotionally, this eased her mind:

“Abhi se de diya, jhagda bhi nahi hoga, tax bhi samajh ke diya (I’ve given it while I’m alive, there will be no disputes later, and we’ve gifted with tax clarity).”

5.3 The Couple Planning Retirement Buckets

A couple in their late 40s – Meera and Rajesh – had most investments in Rajesh’s name because he started investing earlier.

We used gifting to:

• Move some balanced advantage and conservative hybrid funds to Meera’s name.

• Create two independent retirement buckets, each with its own asset allocation, giving both spouses clarity and confidence.

Here, tax was not the main driver; ownership clarity and confidence were.

6. When Does Gifting Mutual Funds Make Sense?

From my practice, the most sensible use-cases are:

1. Passing wealth to the next generation gradually

• Rather than a sudden lump-sum inheritance, you gift units during your lifetime.

2. Tax optimisation within legal limits

• Gifting to adult children / parents whose overall income is low or within rebate limits.

3. Simplifying inheritance

• Using transfers to consolidate and align holdings before anything happens to you.

4. Creating responsibility and awareness

• Gifting SIPs / units to young adults and sitting with them once a year to review performance.

5. Special occasions with long-term value

• Birth of a child, graduation, first job, wedding, milestone birthdays.

It makes less sense when:

• You are trying to gift only to avoid your own tax but recipient is in a similar slab.

• You’re gifting to spouse or minor children purely for tax reasons (clubbing rules neutralise it).

• You’re gifting to non-relatives but ignoring the ₹50,000 gift-tax threshold.

7. Step-by-Step Checklist Before You Gift

Here is a practical checklist I give my clients.

Step 1 – Clarify the Purpose

• Is this for education, emergency corpus, retirement, house down payment, or just a gesture?

• Write one line on your phone for each gift:

“These units are for Rhea’s education / first home / starting business.”

Step 2 – Choose the Right Scheme

• For near-term goals (0–3 years): Consider debt or conservative hybrid funds.

• For long-term goals (5+ years): Equity or aggressive hybrid funds make more sense.

Don’t gift ultra-volatile sector funds to someone who may panic at the first correction.

Step 3 – Check Tax Impact

• What is your current slab?

• What is the recipient’s likely income this year?

• Is clubbing applicable (spouse / minor child)?

• Would it be better to gift units with long-term capital gains (already held for >1/3 years depending on category) or those with short-term gains?

Do a quick back-of-the-envelope calculation or sit with a CA / planner.

Step 4 – Prepare Documentation

• Keep:

• Demat statement / SoA before and after transfer

• A simple gift deed on plain paper, mentioning:

• Names, PAN, relationship

• Scheme name, ISIN, number of units

• Date and declaration that it is a gift without consideration

This document is not mandatory in all cases but extremely useful if there’s ever a query.

Step 5 – Execute the Transfer

• Follow the demat route or SoA route as described earlier.

• Save screenshots / acknowledgements.

Step 6 – Educate the Recipient

This step is often ignored.

Sit down with the recipient (even on a call) and explain:

• What scheme is this?

• Why have you chosen it?

• When should they ideally redeem?

• Who should they talk to before doing anything?

A gift without education can become a source of anxiety instead of empowerment.

8. Common Mistakes to Avoid

1. Gifting from locked-in or restricted schemes

• Some solution-oriented schemes (children’s funds, retirement funds) and ETFs may not be eligible for SoA transfer facility.

2. Ignoring nominee and Will updates

• If you gift a big chunk of your holdings to one child, update your Will to reflect this, so other heirs don’t feel short-changed later.

3. Assuming tax is “saved” forever

• Tax is not magically erased; it’s shifted to the recipient and will arise on redemption.

4. Not checking KYC / bank details

• Incomplete KYC can stall the transfer process.

5. Gifting to non-relatives casually

• Remember the ₹50,000 annual threshold beyond which gifts from non-relatives become taxable as income.

6. No financial conversation with the family

• A surprise folio in someone’s name years later can confuse them. Better to speak openly.

9. Bringing It All Together – My Closing Thoughts

As a financial planner, I see this SEBI move as part of a broader shift:

• From “products” to family-centric planning

• From one person holding everything to shared financial responsibility

• From last-minute inheritance chaos to calm, planned wealth transfer

Gifting mutual funds is no longer a complex, paperwork-heavy idea. It is literally a login, a few clicks, an OTP, and a clear conversation with your family.

If you already have a sizable MF portfolio, ask yourself:

• Which part of this do I want my children or parents to benefit from right now?

• Can I use gifting to simplify my balance sheet and their future?

• Who in my family is in a lower tax slab where this could be efficient?

And then, follow the steps.

If you’d like a structured review, this is exactly the kind of planning I do with families – looking at tax, emotions and long-term goals together, not in isolation.

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I’m CFP® Taresh Bhatia, CERTIFIED FINANCIAL PLANNER® and Founder of The Richness Academy. I guide Indian families to build a clear, values-based financial plan – covering investments, protection, retirement and legacy – so that money stops being a source of stress and becomes a source of confidence.

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