Mutual fund gift rules: What parents must know before transferring to children

Gifting mutual funds is a popular way to build long-term wealth for your child—but new rules have made the process more complex. From demat requirements to tax implications, parents must understand the updated framework to avoid mistakes and ensure a smooth transfer.

Unlike cash or gold, mutual fund units are treated as capital assets under tax law. This means gifting them involves specific rules around transfer, taxation, and compliance. While gifting itself is tax-exempt, the tax impact doesn’t disappear—it just shifts to later stages.

A major update: mutual fund units can now be gifted only in demat form. Transfers in Statement of Account (SoA) mode are largely restricted. Parents must first convert their holdings into demat before gifting, making the process more formal and trackable.

Once units are in demat form, gifting is treated as an off-market transfer. A small fee applies—₹25 or 0.03% of the transfer value (whichever is higher), plus GST and stamp duty. While costs are minimal, compliance is crucial.

Parents do not pay capital gains tax when gifting mutual funds, as gifts are exempt under tax laws. This makes gifting an efficient way to transfer investments without triggering immediate tax liability.

The child receiving the gift pays no tax at the time of receipt. However, when the child sells the mutual fund units, capital gains tax will apply based on the parent’s original purchase cost and holding period.

If the child is a minor, any income generated from the gifted mutual funds is added to the parent’s income (the one earning more). Only ₹1,500 per year per child is exempt. This rule applies until the child turns 18.

To gift correctly: convert units to demat, create a gift deed, transfer via off-market instructions, and pay applicable charges. These rules aim to improve transparency and prevent misuse—so following the correct process is essential.