Indians are always searching for new ways to save tax, especially when it comes to the profit they earn from mutual funds. Now, a lesser-known method is gaining attention, gifting mutual fund units to relatives to legally reduce, or in some cases completely avoid, tax on capital gains.
With the new tax regime changing how gains are calculated, many families have realised that transferring units to someone in a lower income bracket can sharply cut the tax on profits when those units are sold. For some types of funds, the tax can even drop to zero.
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This approach, though legal and recognised under both Sebi rules and the Income Tax Act, comes with several conditions, risks, and misconceptions. Many investors do not know how the holding period works after gifting, who pays tax on the gains, or how clubbing rules can completely undo the tax benefit.
To understand what is actually allowed and how the law works, India Today spoke to Abhishek Kumar, Sebi-registered investment adviser and founder of Sahaj Money. He explained the tax rules, SEBI’s latest changes, and the hidden risks people often overlook.
WHAT THE LAW ALLOWS
Gifting mutual fund units is completely legal in India. Kumar said, “Gifting of mutual fund units in India is legally permitted under Section 47(iii) of the Income Tax Act, which excludes gifts from the definition of ‘transfer’ and therefore does not trigger capital gains tax for the donor.”
Earlier, gifting units was difficult because transfers were allowed only in demat form or required redemption and reinvestment. This has now changed.
“A recent SEBI regulatory change allows transfer of both demat-held units and SOA-based units directly without redemption, making the process easier and removing previous operational barriers,” he said.
WHO PAYS THE TAX ON GAINS?
Many investors believe that once they gift units, their tax responsibility ends forever. That is only partly true.
“In this scenario, the giver or donor does not pay any capital gains tax at the time of gifting but the receiver becomes responsible for capital gains tax only when they later sell the units,” Kumar explained.
Importantly, the tax calculation does not start from the day the person receives the gift.
“The receiver’s tax liability is calculated using the donor’s original cost of acquisition and holding period,” he said, meaning the tax history travels with the units.
One common misunderstanding is that gifting resets the holding period. That is incorrect.
“The receiver’s holding period is calculated from the donor’s date of purchase, not from the gift date,” Kumar said.
He gave an example. If units bought in January 2024 are gifted in November 2025, and the recipient sells in December 2025, the total holding is still nearly two years—qualifying for long-term taxation.
CAN GIFTING REALLY CUT TAX TO ZERO?
Many believe gifting to a low-income family member can help avoid all capital gains tax. This is only partly true.
“This is true for debt funds but also comes with important limitations,” Kumar cautioned.
Under the new tax regime, if the receiver’s total income stays within the Section 87A rebate limit of Rs 12 lakh, tax on debt fund gains can become zero.
“For example, if someone with no other income receives debt fund gains of Rs 12 lakh, they owe zero tax,” he said.
But for equity funds, the rules are stricter.
“For equity funds, gains above Rs 1.25 lakh are taxed at 12.5% and Section 87A rebate does not apply,” Kumar said.
WHO COUNTS AS A RELATIVE?
Tax-free gifting depends heavily on who receives the units.
Kumar explained, “Relatives include spouse, parents, children, grandchildren, siblings, and their spouses. Gifts to these relatives are completely tax-free regardless of amount.”
Gifting to anyone outside this list has limits.
“Gifts to non-relatives above Rs 50,000 in a financial year are taxable as income for the recipient,” he said.
WHEN GIFTING CAN BACKFIRE
Many investors gift units to save tax without checking whether the move actually reduces liability—sometimes it does the opposite.
Kumar said gifting can backfire if the recipient is in a higher tax bracket. “They might be required to pay more tax on gains than you would have,” he said.
Another common mistake is gifting short-term units.
“If you gift short-term capital gain units, the recipient receives short-term status and pays 20% tax, whereas you might have waited to make them long-term,” he said.
THE BIGGEST RISK: CLUBBING OF INCOME
One of the most misunderstood rules is the clubbing provision.
Kumar explained it clearly: “If the donor gifts units to their spouse without adequate consideration or to a minor child, the gains will be clubbed with the donor’s income.”
This means that even though the units are gifted, the tax is still paid by the giver—not the receiver.
“This clubbing continues until the child turns 18,” he said, adding that gifting to spouses and minors is “largely ineffective for tax planning unless the spouse has independent income.”
GENUINE GIFTS VS TAX AVOIDANCE: HOW AUTHORITIES SEE IT
Kumar noted that tax authorities can question gifts that appear artificial or purely for tax planning.
“Major risks include unintended tax consequences and potential scrutiny if the gift appears to lack genuine intent,” he said.
That is why paperwork matters.
“One should gift only through proper documentation such as an irrevocable gift deed,” he advised.
HOW TO GIFT MUTUAL FUNDS CORRECTLY
Two systems exist—demat and non-demat (SOA)—and each has its own process.
“For demat units, both parties need demat accounts. The donor submits a Delivery Instruction Slip specifying the receiver’s demat account and marking the transaction as a gift,” Kumar explained.
“For SOA units, the new SEBI rules allow digital transfer through the CAMS portal using the Transfer/Gift option and OTP verification.”
A formal gift deed is essential. “It must list the security details, quantity, and both parties’ information,” he said.
Gifting mutual funds is legal, increasingly common, and can be a powerful tool for passing on wealth. But it is not a simple tax hack. It requires clear understanding of clubbing, cost carryover, holding period rules, and the income profile of the recipient.
A well-timed gift can help a family member build long-term wealth. A poorly planned one can leave both sides with unexpected tax bills.
As Kumar summed it up: gifting works best when done with “proper documentation” and with a clear view of how the tax rules will play out in real life.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)
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