Gift Mutual Funds to child in 2026: Giving mutual funds as a gift is a great way to build long-term wealth for kids, but new rules have made it trickier. To transfer mutual fund units as a gift, the holding must be in demat form. This transition turns the gifting process into a formal ‘off-market’ transfer, allowing for better tracking and security.
What are the actual costs added in Gifting?
Gifting through demat is treated as an off-market transaction, parents should expect to pay a small processing fee. Typically, this fee is around Rs 25 or 0.03 per cent of the total transfer value, whichever is higher. Additionally, investors must account for GST and the mandatory stamp duty required for such transfers. Though these costs are relatively low, they are essential for ensuring the transfer is legally recognised.
Do parents face immediate tax liabilities?
When does the child have to pay tax?
While the child does not pay any tax at the exact moment they receive the gift, the tax obligation is merely deferred, not eliminated. The tax liability “travels” with the asset. When the child eventually decides to sell or redeem these mutual fund units, they will be responsible for paying capital gains tax. For the purpose of calculating this tax, the original purchase price paid by the parent and the parent’s initial holding period are taken into account to determine if the gains are long-term or short-term.
Are you aware of the minor child “clubbing” trap?
Parents gifting to minor children must be particularly cautious of the “clubbing of income” rules. If the gifted mutual funds generate any income — such as dividends or capital gains upon sale — while the child is still a minor, that income is legally added back to the income of the parent who earns more. There is a very small exemption of only Rs 1,500 per child per year. Once the child turns 18, they are treated as an independent taxpayer, and the clubbing provisions no longer apply.
How can you ensure a legally safe transfer?
To ensure the gift is indisputable and follows all regulatory guidelines, parents should follow a structured step-by-step process. This starts with ensuring both parties have demat accounts and is followed by the execution of a formal Gift Deed.
A Gift Deed serves as legal proof of the transfer and the intention behind it. Finally, the transfer is completed via off-market instructions to the depository participant. Following these steps helps prevent future legal hurdles and ensures the child’s financial future is built on a solid, transparent foundation.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
