Diwali 2025: Can mutual funds be gifted? Here is how it works

With Diwali, the festival of lights, finally here, the joy of giving is all around us. And while traditional gifts like sweets and festive boxes never go out of style, this year, why not do something a little different?

Just make sure the units are held in demat form, as only then can they be transferred, much like shares, through an off-market transaction.

Can we gift mutual funds on Diwali?

Yes, mutual fund units can be gifted. However, the units must be held in demat form.

"Yes, if the mutual fund units are in demat form, they can be transferred directly. For units held in statement of account form, SEBI has directed mutual funds to provide a facility that enables the transfer of such holdings," said Mumbai-based tax and investment expert Balwant Jain.

"If you currently hold them in physical form, you need first to convert them into demat form. Once the units are in demat form, they can be transferred to the person you wish to gift them to, just like shares are transferred through an off-market transaction," said Pankaj Mathpal, MD & CEO at Optima Money Managers.

Step 1: Ensure both parties have demat accounts

• Both the giver (donor) and receiver (donee) must have active demat accounts.

• The mutual fund units must be held in demat form, not in physical folio or statement of account format.

• If your units are still in folio form, you’ll need to convert them to demat first through your Depository Participant (DP).

Step 2: Initiate an of-market transfer

• Collect a Delivery Instruction Slip (DIS) from your DP.

• Fill in the donee’s demat account number and relevant details.

• Provide the ISIN (unique identifier for mutual fund units), the number of units, and mention the reason as “Gift”.

• Submit the completed DIS to your DP for processing.

Step 3 Transfer Confirmation

• Once processed, the mutual fund units will be reflected in the donee’s demat account.

If both donor and donee have demat accounts with CDSL, the transfer can also be done online using CDSL’s EASIEST (Electronic Access to Securities Information and Execution of Secured Transactions) platform.

The transfer process may take 1-2 more business days after the verification. However, in some cases, it may be delayed for various reasons.

For completing the transfer of mutual fund units from one demat account to another demat account, a transaction fee of 0.03% of the transfer value or ₹25, whichever is higher, along with GST at 18% will be charged. A stamp duty of 0.015% will also apply to all such transfers.

On the other hand, under Section 56(2)(x), if a person receives property (which includes mutual fund units) as a gift from a relative, it is exempt from tax in the hands of the recipient as well, provided the person qualifies as a "relative" as defined under the Act.

However, if the recipient decides to sell the mutual fund units in the future, capital gains tax will apply at that time. For the purpose of calculating capital gains:

The original purchase price (i.e., what the donor paid) is considered the cost of acquisition.

The holding period of the donor is also taken into account when determining whether the gain is short-term or long-term.

The Income Tax Act defines the following individuals as "specified relatives" for tax-free gifts:

• Spouse

• Brother or sister

• Brother or sister of the spouse

• Brother or sister of either parent

• Any lineal ascendant or descendant (e.g., parents, grandparents, children, grandchildren)

• Lineal ascendant or descendant of the spouse

• Spouses of all the above relations

Gifts to friends, cousins, or distant relatives may not fall under this exemption and could be taxable, depending on the value and nature of the gift.