Gifting Mutual Funds to Children: New Rules Every Parent Should Know

Gifting mutual funds to children has become a popular way for Indian parents to build long-term wealth for their kids. But recent regulatory changes and strict tax rules mean you must be careful before transferring units. New AMFI guidelines, demat requirements, and clubbing rules have all changed how gifting works.

Why Gifting Mutual Funds is Not as Simple as It Looks

Many parents think gifting mutual fund units is as easy as gifting jewellery or cash. But mutual fund units are treated as capital assets under the Income Tax Act. This means they are subject to special transfer rules and tax rules.

The mutual fund units fall under Section 2(14) of the Income Tax Act, and normally any transfer would attract capital gains tax. However, gifting is an exception.

1. New Rules for Gifting Mutual Funds: What Has Changed

Gifting units in SoA (non-demat) mode is now highly restricted. According to the AMFI guidelines, mutual fund houses do not allow free transfer of units held in Statement of Account (SoA) mode. Only three exceptional situations allow such transfers:

1. A surviving joint holder adding new joint holders after a death
2. A nominee transferring units to legal heirs after transmission
3. A minor turning 18 and adding a parent or sibling as a joint holder

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Regular gifting in SoA mode is not allowed. This is a key change every parent should be aware of. Demat mode is now the only way to gift mutual funds smoothly. The report states clearly that to gift MF units, you must first convert them to demat mode. Once converted, gifting becomes simple and treated like any other demat-to-demat off-market transfer.

The cost involved:

• 0.03% of the transfer value or ₹25 (whichever is higher) plus GST
• 0.015% stamp duty

2. Tax Rules for Parents (Donors)

No capital gains tax when gifting. As explained by Dr. Suresh Surana in the Business Today article, gifting mutual funds does not create a capital gains tax liability for the parent. This is because Section 47(iii) specifically excludes gifts from the definition of taxable transfer. This means you can gift without worrying about immediate tax.

3. Tax Rules for Children (Recipients)

• Gifts from parents are fully tax-free
• Since parents are considered “relatives,” the child receiving the units does not pay any gift tax.

4. When the Child Sells the Units: Capital Gains Apply

Even though gifting is tax-free, the capital gains will apply when the child redeems the units, based on:

• The parents’ original purchase cost
• The parents’ original holding period

This means the child inherits your cost and time of investment.

5. Clubbing Rules for Minor Children

This is the biggest trap parents must understand. If you gift mutual funds to a minor child, any income generated from those units (dividends or capital gains) is added to the income of the parent with the higher income.

• This rule does not change under the new guidelines.
• Only a small exemption of ₹1,500 per year per minor child is allowed.

Once the child turns 18, clubbing stops.

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6. How to Gift Mutual Funds the Right Way (Step-by-Step)

Based on the new rules and the Business Today guidance:

Step 1: Convert units to demat (mandatory)

• Submit a Conversion Request Form (CRF) offline or use the demat portal online.

Step 2: Execute a Gift Deed

• Prepare a simple gift deed stating relationship, units, and signatures.

Step 3: Transfer units using a DIS or online off-market transfer

• Enter the child’s demat details.

Step 4: Pay the small transfer fee and stamp duty

Note: Parents can also directly invest in the minor’s name with themselves as guardians. When the child turns 18, full ownership transfers to them.

8. Transfers After Death: Transmission Process

The report explains that gifting during lifetime is very restricted in SoA mode, but transmission after death is always allowed, with documents like:

• Death certificate
• KYC
• Bank details
• Indemnity bond (sometimes)

If there is a joint holder, the units automatically move to the surviving holder.

9. Why These Restrictions Exist

Regulators have tightened rules to prevent money laundering, Tax evasion, and Fraudulent transfers.Since mutual funds can be sold easily, SEBI and AMFI do not allow them to move freely in SoA mode.

Key Takeaways for Parents

• You cannot gift SoA-mode units freely anymore
• Demat mode is mandatory for regular gifting
• Gifting is tax-free, but selling triggers capital gains
• Any income for minor children gets clubbed with parents
• Transmission after death is allowed even without demat

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