Transfer of mutual funds to son as gift

So RNI and SEBI have introduced online transfer of mutual funds, including gifting. Fund houses are saying they will report this as redemption, but articles online say there is no tax since it is a gift. You are wondering if the IT dept. should clarify this via a circular to confirm it is non-taxable , otherwise the purpose of this scheme is kind lost. You are also thinking maybe you would end up paying LTCG and then gift. 

Blood relation no tax sec 56(x) 2

Blood relation no tax sec 56(x) 2

All these are very general responses to a particular aspect of a scheme to transfer Mutual funds in SOA format not demat to relatives. However if you transfer  SOA funds the fund houses say it will be reported as redemption even though the transfer reason says gifting.That means IT will tax the redemption LTCG though it is a gift. I AM SAYING INCOME TAX DEPT SHOULD STEP IN AND CLARIFY THAT THE TRANSFER IS TAX EXEMPT AND NOT TO BE CONSIDERED AS REDEMPTION. I AM SURPRISED IT DEPT ,SEBI,RBI WHICH INTRODUCED THIS SCHEME OF TRANSFER OF MUTUAL FUNDS USING CAMS OR CVL OR FUND HOUSES DID NOT BOTHER AND GO INTO THE DETAILS AND IT CALLED REDEMPTION. IT SHOULD INTRODUCE A CLAUSE SAYING IT IS NOT REDEMPTION AND HELP FUND HOLDERS TRNSFER MUTUAL FUNDS USING SAY CAMSONLINE AS A GIFT AND THATS WHAT IT IS. WHY IT DEPT IS SLEEPING IN DONT UNDERSTAND. ONE MAY AS WELL SELL THE FUNDS,PAY LTCG AND TRANSFER THE PROCEEDS TO RELATIVES AND THE RESULTS ARE THE SAME. THE PURPOSE OF INTRODUCING THIS SCHEME WAS TO HELP PEOPLE HOLD MFs to transfer to relatives tax free.

i understand the funds should be converted to demat form to enable transfer tax free off line. why this unnecessary hassle FOR PEOPLE HO.DING MFs. IS THE OBJECT OF THE SCHEME INTRODUCED BY SEBI, RBI THAT SOA TYPE MFs can be TRANSFERRED TO RELATIVES IS A GIMMICK OTHERWISE. THEY DONT SEE THE IMPLICATIONS.MANY ARE CONCERNED ABOUT CONVERTING THEIR MF FOLIO INTO DEMAT FORM AS THEY ARE HAPPY AS SUCH WITH SOA FORMAT.

SO IT DEPT, PL STEP IN AND CLARIFY WHY YOU ARE MAKING SIMPLE THINGS COMPLICATED?? 

SEBI’s Regulatory Change – Process, Not Tax Law

New SEBI rule

• SEBI has recently allowed transfer/gifting of mutual fund units directly between investors (including SOA units, not just demat) via online processes. 

Key point

• This rule does not change Income-Tax law itself — it only makes it operationally easier to transfer units without redemption. 

Before SEBI change

Summary for Quick Reference

• If units were in non-demat form, the only practical way to “transfer” was to redeem (triggering capital gains for the donor) and then have the donee re-invest. The donor would pay tax then.

Under the new process, you can avoid that redemption step, so the capital gains event at the time of gifting is typically avoided for the donor.

No tax on the gift itself. The RTA's "redemption" reporting is a data label, not the law.

The law

• For you (donor): A gift is not a "transfer" for capital gains (Sec 47(iii), 1961 Act; Sec 70 of the Income-tax Act, 2025). No LTCG arises on gifting.

• For your son (donee): Units received from a father are a gift from a "relative", exempt under Sec 56(2)(x).

• When your son sells: His cost is your original cost (Sec 49(1)), and his holding period includes yours (Sec 2(42A) Explanation 1(b)). Grandfathering of equity funds as on 31.01.2018 also carries over.

• Clubbing: If the son is a minor, income and gains on the units are clubbed with the parent (Sec 64(1A)). For an adult son, no clubbing.

Handling the reporting issue

• If AIS shows the transfer as a sale or redemption in your name, submit AIS feedback: "Information is not fully correct – transfer by way of gift, no consideration received".

• Do not report it as a capital gain in your ITR. Keep a gift deed (or gift letter), the RTA transfer request showing reason "gift", and the son's acceptance.

Practical tip

• Selling and gifting cash triggers your LTCG (above the Rs 1.25 lakh Sec 112A exemption). Gifting units defers the tax to your son's sale, at his slab and his exemption.