Sebi move makes MF gifts easier, cheaper

Sebi's new regulation allows mutual fund investors to gift units, including statement of account holdings, eliminating the need for redemption and triggering capital gains tax. This reform facilitates tax savings for individuals by transferring units to family members with lower taxable income, making gifting and inheritance processes significantly easier and more tax-efficient. - AHMEDABAD: A regulatory tweak by Sebi has opened the door to sizable tax savings for millions of mutual fund (MF) investors, simply by making it easier to gift their units. Tax experts say the reform, which now allows transfer of even statement of account (SOA)-based MF units and not just demat units, removes the biggest hurdle in gifting, inheritance and joint holding of mutual fund assets. Until now, investors could give only demat-held MF units; all others had to be redeemed and repurchased, triggering avoidable capital gains tax. Under the new rules, an investor sitting on sizable MF gains can transfer the units directly to a family member, typically an adult child or parent with little or no taxable income - and the recipient's gains could fall entirely within the Section 87A rebate limit. International tax expert Mukesh Patel called it a long-awaited and welcome reform. "If an individual has a Rs 10 lakh gain and gifts those units to an adult son or daughter who has no income, the entire gain can effectively be tax-free. Mutual funds have emerged as a key asset for Indian families, but gifting or inheritance processes were archaic," he said. "Even demat-held MF units could not be transferred in cases of inheritance or succession, forcing families to redeem and incur tax. If the head of a family passed away and his MF units were to be distributed between his two sons, there was no option but redemption." With Sebi's new framework, both demat and SOA units can now be gifted or transferred with ease, whether under a Will, in cases of inheritance, or while adding or removing joint holders. Patel added that the provision opens a straightforward tax-planning route. Individuals in a higher tax slab can gift MF units to an adult family member not having taxable income. With Section 87A benefits, debt fund gains up to Rs 12 lakh can now be enjoyed fully tax-free. City-based financial adviser Mumukshu Desai said the impact has been immediate. "The decision has been in the pipeline since April, and in the last 20 days alone, we've already handled four to five cases. Earlier, gifting mutual funds was theoretically permissible under income-tax rules, but practically impossible without selling the units. You had to sell and repurchase, and pay capital gains tax, just to execute a gift," he said. "Now, with just a link and two OTPs, it's done." Desai recalled instances where people sold MF holdings during marriages or festivals like Raksha Bandhan just to give money to siblings or children. "Now they can simply gift the units themselves. No sale, no exit load, no tax. You can add a holder, remove a holder, or include a parent or child with ease. The entire hassle of withdrawing units just to change the holding pattern has disappeared," he added. End of Article