How to Gift Mutual Funds? || SEBI’s New Proposal

SEBI has quietly changed something that most investors have not noticed yet. It affects your family, your taxes, and the way you think about giving.

Think about the last meaningful gift you gave someone. A relative’s wedding, perhaps. A child’s birthday. Chances are you gave cash, or something that was used up, worn out, or forgotten within a year.

Now think about this: what if that gift was still growing?

That is exactly what mutual fund gifting allows you to do. And thanks to regulatory changes by SEBI in 2024, 2025 and 2026, it has gone from being a complicated, tax-heavy process to something you can complete in a few clicks on your phone.

SEBI’s New Proposal – What Made This Possible

For years, gifting a mutual fund was more theory than practice. Unless you held units in a demat account, your only real option was to sell the units, pay exit loads and capital gains tax, and then buy them again in the recipient’s name. In other words, you were gifting the after-tax proceeds, not the investment itself.

That has now changed.

Investors holding units in Statement of Account (SoA) / non-demat mode can now transfer or gift their mutual fund units online without first converting them into demat form, subject to scheme- and lock-in–specific restrictions. The process is handled digitally through RTAs and AMC portals and is designed for life‑event transactions such as gifts, succession and addition or deletion of joint holders.

From a tax perspective, in typical gift, inheritance and transmission situations, the recipient effectively steps into the shoes of the original holder: the original cost and the original holding period generally continue in the hands of the new holder. This preserves the benefit of long-term compounding and long-term capital gains treatment when the units are eventually sold.

In March 2026, SEBI went a step further, issuing a consultation paper proposing the introduction of Gift Prepaid Payment Instruments (Gift PPIs) to be used exclusively for subscribing to mutual fund units. Think of it like a Swiggy gift card, except instead of one dinner, you are gifting the beginning of someone’s investment journey.

Under SEBI’s proposal, the key features of these Gift PPIs are:

• Value: Each Gift PPI can hold up to ₹10,000.

• Usage: They are non-reloadable; once the value is used, the instrument is finished.

• Validity: They expire one year from the date of issuance. Any unused balance is proposed to be refunded to the purchaser after expiry.

There are also overall caps being discussed (for example, total annual investments via gift PPIs and similar routes) and operational safeguards such as strict “no third‑party payment” compliance, funding only from Indian bank accounts via UPI/net banking, and no cashbacks or incentives.

Why This Is Actually a Big Deal

Most people do not think of gifts as financial decisions. But they are.

Every time you hand over cash at a wedding, the odds are high that it gets spent. Every time you gift a phone or gadget, it starts depreciating the moment the box is opened.

Mutual funds are different. They continue working for the recipient long after the gift is given.

A ₹1 lakh investment in a diversified equity fund, gifted to a 10‑year‑old and left untouched until they are 25, could realistically grow to ₹5–7 lakh or more at historically reasonable equity return assumptions. You give once. The gift keeps compounding in the background for 15 years.

There is also a behavioural benefit. When a young person sees their own name on a mutual fund statement for the first time, something changes. They start tracking it. They get curious. They understand, not by listening to a lecture but through lived experience, what it means to let money work for them.

And now, with SEBI’s changes, setting this up takes just KYC, a folio, a few online forms and an OTP.

Scenarios That Show How This Works in Real Life

Case 1: Ramesh Gifts His Daughter an Index Fund Every Birthday

Ramesh decides to invest ₹1 lakh into a Nifty 50 index fund in his 5‑year‑old daughter Meera’s name every year on her birthday. He does this directly into a folio where she is the primary holder, and documents it as a gift using a simple gift deed.

Over 12 years, assuming a 12 percent CAGR, this annual contribution can grow to roughly ₹24–25 lakh by the time she turns 17. If she redeems in small tranches while she is a student with little or no other income, her effective tax on those gains can be very low compared to what Ramesh would have paid in his own 30 percent slab.

The wealth is in her name, the compounding has happened over her entire childhood, and the tax impact can be significantly more efficient than if he had saved in his own name and tried to transfer cash later.

Case 2: Priya Shifts a Debt Fund to Her Retired Mother

Priya, in her late thirties and firmly in the 30 percent tax bracket, holds ₹10 lakh in a debt mutual fund with substantial unrealised gains. If she redeems the units herself, the tax bill would be meaningful.

Instead, she transfers the units as a gift to her retired mother, who has a modest pension and limited other income. When the mother redeems the units gradually over the next couple of years, the capital gains are computed using Priya’s original purchase cost and holding period, but the tax is levied at the mother’s slab rate, which is much lower. In some years, depending on her total income and the applicable tax regime, the effective tax could even be close to zero.

Case 3: A Wedding Gift That Compounds for Twenty Years

At a cousin’s wedding, instead of an envelope of cash, a relative opens a zero‑balance folio in the couple’s joint names and gifts units of a flexi‑cap fund worth ₹50,000.

If this is left untouched for 20 years, and the fund earns a 12 percent CAGR, that ₹50,000 can grow to roughly ₹4.8 lakh. The couple did nothing. They may not even remember receiving the gift in their twenties—but in their forties, it shows up as a meaningful corpus.

Compare that to a ₹50,000 cash gift, which is likely to be spent within months on wedding or honeymoon expenses.

The Tax Part

This is the part most people miss when they think about gifting mutual funds.

Part One: When You Give the Units

When mutual fund units are gifted (transferred without consideration), the transfer itself does not trigger capital gains tax for the donor.

Section 47(iii) of the Income Tax Act specifically excludes a transfer of a capital asset under a gift, will or irrevocable trust from the definition of a “transfer” for capital gains purposes, subject to certain conditions. In other words, you do not pay capital gains tax merely because you gifted the units.

Part Two: Whether the Recipient Pays Tax on Receiving the Gift

Tax on receipt depends on who you are gifting to and the total value of gifts received in the year:

• Specified relatives: If you are gifting to a “relative” as defined under Section 56(2)(x)—for example, spouse, children, parents, siblings and certain lineal ascendants/descendants—there is no gift tax in the hands of the recipient, regardless of the amount. The transfer is fully exempt from tax on receipt.

• Non‑relatives: If you are gifting to a friend or any non‑relative, and the aggregate value of all gifts that person receives from non‑relatives during the financial year exceeds ₹50,000, then the entire amount above that threshold becomes taxable as “Income from Other Sources” in the recipient’s hands. The “all or nothing” rule applies: once the total crosses ₹50,000, the full value (not just the excess) becomes taxable.

Note that gifts received on certain occasions—such as on the recipient’s own marriage—or from specified entities can also be exempt even if the donor is not a relative.

Part Three: When the Recipient Eventually Sells

This is where real planning happens.

When the recipient eventually sells the mutual fund units, capital gains tax will apply. However, the cost of acquisition and the holding period are normally taken from the original investor.

In practice, this means: if you bought a fund five years ago for ₹1 lakh and it is now worth ₹3 lakh, and you gift it today, the recipient inherits your ₹1 lakh cost and your five‑year holding period. If they sell the units tomorrow for ₹3 lakh, the ₹2 lakh gain is treated as long‑term capital gains in their hands.

The tax history travels with the units. You are not erasing the gain; you are transferring who will eventually pay the tax on that gain.

The Clubbing Trap

Here is what trips up a lot of families.

If you gift mutual fund units to your spouse or to your minor child, the income from those units (dividends, interest and capital gains) is generally clubbed back into your own income under the clubbing provisions of the Income Tax Act. You effectively end up paying tax on their gains as if the units were still in your own name.

Clubbing can also apply in certain cases where assets are gifted to a daughter‑in‑law or where transfers are structured through intermediaries for the benefit of a spouse.

By contrast, gifting to adult children, parents, grandparents, adult siblings and other covered relatives does not normally trigger clubbing. In those cases, the income and gains are taxed in the recipient’s hands at their own slab rate, subject to the normal gift-tax rules and capital-gains rules.

The Opportunity Inside the Rules

If you gift units to a relative who has little or no income, that person can potentially use the Section 87A rebate (under the applicable tax regime) to reduce or even eliminate their overall tax liability, as long as their total taxable income stays within the rebate threshold and the income in question is eligible for the rebate.

Under the current new tax regime, the Section 87A rebate can reduce tax to zero for resident individuals with taxable income up to ₹12 lakh, but important caveats apply. Many types of capital gains that are taxed at special rates—such as long‑term gains on listed equity shares and most equity‑oriented mutual funds—do not qualify for the rebate, even if the person’s total income is within the threshold.

However, there is still planning room.

• If the gifted units are in funds whose gains are taxed at normal slab rates (for example, many debt mutual funds after the 2023 rule changes), those gains may be able to benefit from the Section 87A rebate if the recipient’s total income remains within the limit.

• Even where Section 87A cannot be used for special‑rate capital gains, shifting gains to a relative in a lower slab can still significantly reduce tax compared to realising the gains in the hands of a 30 percent slab taxpayer.

The key idea is that you are not just shifting wealth; you are also shifting who pays tax on future gains, within the boundaries of the clubbing and gift‑tax rules.

How to Actually Do This

The operational process is simpler than most investors expect.

1. Sort out KYC for the recipient
   The recipient needs to be KYC‑verified and must have a folio with the same fund house (AMC) in which you currently hold the units. Most AMCs and RTAs now allow you to open a “zero‑balance folio” online in a few minutes using PAN and KYC details.

   
   

2. Check if the specific scheme allows transfers
   The SoA transfer facility is generally available for most open‑ended equity and debt schemes, but there are important exceptions. Units under lock-in (such as ELSS units within their three‑year lock‑in), ETFs, and certain solution‑oriented or successor schemes (for example, old retirement/children’s funds being merged into life‑cycle funds) are typically not transferable while they are under lock-in or during transition. Only “free” units—those not subject to lien, freeze, or lock‑in—can be transferred.

   
   

3. Use MF Central, an RTA portal, or the AMC portal
   Log in to the relevant RTA (such as CAMS or KFintech), MF Central, or the AMC’s own website. Select the fund and folio, choose the “transfer/gift units in SoA mode” option, enter the recipient’s folio number and PAN, and complete the OTP-based authorisations for both parties. Transfers are generally processed on a FIFO (First-In, First-Out) basis and completed within a couple of working days, with a brief cooling‑off period during which the transferred units cannot be redeemed.

   
   

4. Write a simple gift deed for larger transfers
   For any significant gift (for example, above ₹1 lakh), it is sensible to execute a short gift deed on appropriate stamp paper. This records that the transfer was made without consideration, documents the relationship between donor and donee, and becomes valuable evidence in case of any future tax or legal queries.

   
   

5. Preserve cost and holding-period records
   Ensure that you keep your original contract notes, account statements, or digital records showing the purchase date(s) and purchase cost of the units gifted. The recipient will need these cost and date details to compute capital gains correctly when they eventually redeem.

   
   

6. Coordinate with your tax advisor
   Because gifting interacts with Section 47(iii), Section 56(2)(x), Section 64 (clubbing) and Section 87A, it is good practice to review your gifting and redemption plan with a chartered accountant—especially if you are planning large transfers, gifting to non‑relatives, or using a series of gifts as part of broader tax planning.

   
   

Conclusion

India has a deep gifting culture—weddings, Diwali, birthdays, first salaries, retirements. We give often, and we give meaningfully. But for decades, we have mostly given in forms that do not last.

SEBI’s recent changes and proposals are trying to redirect this ingrained habit towards long‑term wealth creation. The habit of giving is already there; only the form is evolving.

A mutual fund unit is not an abstract financial instrument. It represents a slice of hundreds of companies, compounding quietly over years. When you gift it to someone, you are giving them a small stake in the economy’s future.

Think of mutual fund gifting as re‑aligning your family’s financial compass towards long‑term wealth and smarter tax management. You can start small: gift a simple index fund to each child on every birthday, track it together, and gradually hand over responsibility as they grow. You are building both wealth and financial discipline.

That may be a far better gift than almost anything else you could put in an envelope.

Disclaimer: This article is for informational and educational purposes only. Tax rules and SEBI regulations can change, and their practical application depends on individual facts and on whether you are using the old or new tax regime. Please consult a qualified financial advisor or chartered accountant before implementing any gifting or investment strategy.