Before You Gift Mutual Funds, Know These Tax Rules

Gifting mutual funds has tax implications, and one may end up paying taxes if one is not aware of the rules. We take a look.

The Holding Period Carries Forward — It Doesn’t Restart

Most people assume that gifting mutual fund units resets the holding period. It doesn’t. The tax clock simply travels with the units. “If you bought units in January 2024 and gift them in November 2025, the recipient gets long-term status immediately. Gifting doesn't restart the clock,” says Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA), and founder and chief investment advisor of SahajMoney, a financial planning firm.

There’s no fresh waiting period, no restart button. This alone makes gifting one of the smartest but most misunderstood tax moves in personal finance.

Debt Funds Can Actually Be Tax-Free In The Right Hands

Debt funds are governed by a very different tax rulebook compared to equity. If an adult in a lower tax bracket receives debt fund gains, and their total taxable income (including those gains) stays under Rs 12 lakh in a financial year, they can claim the Section 87A rebate and pay zero tax. Equity funds don’t get that benefit. Even if the recipient earns very little, equity fund long-term capital gains (LTCG) above Rs 1.25 lakh in a year is taxed at 12.5 per cent flat — rebate or no rebate. Because most investors don’t realise this gap, they often gift equity when debt would’ve delivered the real tax win.

Gifting To Spouse And Children Has Tax Implications 

When you gift to your spouse and children, the gains get clubbed back to your income, which means you still pay the tax. “Gift to your spouse or minor child, and the gains get clubbed back to you. You end up paying the tax anyway. It only works if your spouse has independent income,” says Kumar.

If your goal is tax efficiency, the safer, cleaner route is gifting to an adult blood relative (parents, siblings, or adult children) in a lower tax slab, where clubbing rules don’t pull the gains back to you.

Gifting Outside Close Relatives Comes With Rs 50,000 Limit 

“Gifting to a friend or extended family? Anything above Rs 50,000 gets taxed as their income,” says Kumar.

If the recipient is not a close relative—say a friend or cousin—and the market value of the gifted units crosses Rs 50,000, the excess gets taxed as their income under “Income from Other Sources.” Depending on their total income, that can mean tax at 10 to 30 per cent. Most people only learn this rule after the damage is done—when they’re already facing a notice. What was meant to be a simple transfer suddenly becomes taxable income plus extra compliance stress.

Higher Tax Bracket Recipients Can Increase Liability

If you gift units to someone in a higher tax bracket, that may end up triggering more tax than you would’ve paid otherwise. Timing matters just as much. Equity fund short-term capital gains (STCG) are taxed at 20 per cent, while LTCG is 12.5 per cent.