In a significant move that benefits millions of mutual fund investors across India, the Securities and Exchange Board of India (Sebi) has introduced a regulatory change that opens the door to substantial tax savings. The reform simplifies the process of gifting mutual fund units, making it easier for families to transfer wealth without triggering unnecessary tax liabilities.
What Changed in Sebi's Mutual Fund Rules?
The key reform eliminates the distinction between demat-held mutual fund units and statement of account (SOA) based units for transfer purposes. Previously, investors could only gift mutual fund units held in demat form. All other units had to be redeemed and repurchased to effect a transfer, which automatically triggered capital gains tax even when the intention was simply to gift to family members.
Under the new framework, both demat and SOA units can now be directly gifted or transferred, whether under a Will, in cases of inheritance, or while adding or removing joint holders. This removes what tax experts describe as the biggest hurdle in gifting, inheritance, and joint holding of mutual fund assets.
How This Creates Major Tax Savings
International tax expert Mukesh Patel explained the significant financial impact of this 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," he stated.
The strategy works by transferring mutual fund units with substantial gains to family members who have little or no taxable income. The recipient's gains could then fall entirely within the Section 87A rebate limit, which provides tax relief for individuals with income up to Rs 12.5 lakh. Patel emphasized that mutual funds have emerged as a key asset for Indian families, but until now, the gifting and inheritance processes were archaic and tax-inefficient.
City-based financial adviser Mumukshu Desai confirmed the immediate practical impact of the decision. "In the last 20 days alone, we've already handled four to five cases," he revealed. Desai noted that while gifting mutual funds was theoretically permissible under income-tax rules, it was practically impossible without selling the units previously.
Real-World Applications and Benefits
The reform addresses several common financial scenarios that Indian families regularly encounter. Desai recalled instances where people sold mutual fund 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," he explained.
The new system also simplifies inheritance procedures. Previously, even demat-held mutual fund 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 mutual fund units needed distribution between his children, there was no option but redemption with accompanying tax consequences.
With Sebi's new framework, the process has become remarkably straightforward. "Now, with just a link and two OTPs, it's done," Desai highlighted, emphasizing the ease of the new transfer process. The entire hassle of withdrawing units just to change the holding pattern has disappeared, allowing seamless addition or removal of holders, including parents or children.
For individuals in higher tax slabs, this provision opens a straightforward tax-planning route. They can gift mutual fund units to adult family members without taxable income, and with Section 87A benefits, debt fund gains up to Rs 12 lakh can now be enjoyed completely tax-free by the recipient.
