De-Tax. Novel ways to gift mutual funds

Considering that mutual funds are good savings vehicles, these investments are being encouraged to be given as gifts to your near and dear ones.

While the idea seems interesting, you cannot make a ‘gift’ investment in your spouse’s name by using funds from your bank account. Mutual funds don’t accept third-party payments.

You also cannot make an investment in your name and transfer the mutual fund units to your spouse on maturity.

The only situation in which the units can be transferred to another holder is upon the demise of the original holder.

So, essentially, if you do want to give a mutual fund investment, you will have to transfer the funds to your spouse’s account to enable him/her to make an investment in his/her name.

Else, you will have to redeem the units on maturity, get the amount credited into your bank account first and then transfer the amount to your spouse’s bank account.

This takes away the charm of gifting. Fund houses have come up with innovative ways to work around this.

One is children’s schemes such as HDFC Children’s Gift Fund, ICICI Prudential Child Care Plan, etc that have been in the market for quite long now. Here, investments can be made in the name of the minor child, even though the parents may be putting in the money.

New ideas

Most funds offer the option of a lock-in until the child turns 18. The intention is that the amount could come of use for the child’s higher education. You can, however, also choose to invest without the lock-in. More recently, SBI Mutual Fund last month introduced the ‘Bandhan’ SWP (Systematic Withdrawal Plan). Under this, you can make an investment in the growth option of any of the eligible schemes under SBI Mutual Fund. Regular payouts from this fund in the form of systematic withdrawal will be given to a beneficiary who can be your family member.

The amount will be transferred directly to the beneficiary’s bank account on the given date.

Tax issues

Attention needs to be paid to the taxation aspect in situations where the investor and beneficiary are different people.

As per the Income Tax Act, gift received from a relative is always exempt from tax. Relatives here are defined as parents, spouse, siblings and spouse’s siblings, parent’s siblings, lineal descendants (including spouses) and spouse’s lineal descendants (including spouses).

The rules apply for minor beneficiaries too. So these investments are out of the gift tax net.

Besides, both debt and equity funds are subject to short and long-term capital gains tax.

If your spouse makes an investment in his/her name after you transfer the sum as a gift, your spouse will be liable to tax on the capital gains in the normal course.

If you make the investment and then transfer the sales proceeds to your spouse, you will have to bear the capital gains tax.

When you make an investment in any of the children’s plans in the name of your child, you will still be liable to pay capital gains on redemption even though the investment is in the name of the child.

For one, if your child is still a minor at the time of redemption, his income will anyway have to be clubbed with that of the parent as per tax rules.

Even otherwise, any transfer of the amount to the child is still a ‘revocable transfer’, according to Neha Malhotra, Executive Director, Nangia &Co. Hence, capital gains will be subject to tax in the hands of the transferor as per clubbing provisions of the Income-Tax Act. A ‘revocable transfer’ is one where the transferor has a right to re-assume power directly or indirectly over the whole or part of the income or the asset.

In this case, you indeed have the right to discontinue your investments in the child plan, sell the units and use them for some other purpose.

Similarly, under schemes such as the Bandhan SWP too, it is the investor who has to bear the tax burden. Says Archit Gupta, Founder & CEO, ClearTax, “Since the ownership of the financial asset /investment lies with the one who makes the investment, the investor has to bear the tax, even though the beneficiary is a different person”.

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