With Sebi’s New Rule, Investors Can Gift MF Units Directly And Reduce Tax Burden

A recent regulatory tweak by the Securities and Exchange Board of India (Sebi) has made it much easier to gift mutual fund (MF) units. This change can help investors avoid unnecessary capital gains tax when transferring MF units. It can also make family-level tax planning more efficient.

Earlier, investors could gift only demat-held MF units. Those holding units in a statement of account (SOA) form had no such option and were forced to redeem their units and buy them again in the recipient’s name. This redemption meant the donor had to pay capital gains tax. Sebi’s new framework fixes this. Investors can now transfer both demat and SOA units directly.

To understand the tax impact, Outlook Money spoke to CA Ashish Niraj, Partner, ASN & Company.

1. Will capital gains tax apply when gifting MF units now?
“There is no change in Income Tax provisions for gifts due to this regulatory change by Sebi. Gift to relatives was also exempt earlier. But there was a practical problem because only dematerialised units could be transferred. If a donor wanted to gift MF units earlier, he had to redeem them, and then the donee had to buy them. This triggered capital gains in the hands of the donor. Now the donor can transfer units without redemption. So there will be no capital gains tax fo r the donor. But only gifts to relatives are exempt. Gifts to non-relatives above Rs 50,000 (except on marriage) are taxable.”

2. Can gifting MF units to a family member help reduce overall tax?
“Yes. With proper planning, gifting MF units can reduce the family’s total tax burden. If the donee sells the units, capital gains will apply. But the cost and holding period of the donor will be used. If the units are gifted to a relative who has little or no income, that person can use the 87A rebate. This can reduce the tax liability up to Rs 12 lakh. But from FY 2025-26, the 87A rebate can only be claimed on debt funds. Equity MF gains will not be eligible for the 87A rebate.”

3. If the recipient sells the gifted units soon, will it be STCG or LTCG?
“The nature of the capital gain depends on the donor’s holding period. For equity funds, more than 12 months is long-term. For example, if Mr X bought units on January 1, 2025, gifted them on December 2, 2025, and the son sold them on December 15, 2025, the total holding period is only 11 months and 15 days. So STCG will apply. However, if Mr X had bought the same units on November 1, 2024, and transferred them to his son on December 2, 2025, and his son further sells the gifted units on December 15, 2025, the combined holding would be 13 months 15 days. In that case, LTCG will apply. Debt fund gains are always short-term.”