How you can gift stocks, mutual funds this festive season

With the festive season upon us around the corner, many people are looking for meaningful gifts for family and friends. One option is to gift financial assets such as shares, exchange-traded funds (ETFs), or mutual fund units, which can continue to grow long after the festivities are over.

Gifting these investments is now simpler than before. How you do it depends on the mode in which your investments are held, and the tax treatment depends on who receives the gift. Here is how you can do it.

Demat-held securities

If your shares, ETFs or mutual fund units are in a demat account, you can gift them by transferring them directly to the recipient's demat account without selling them. This is called an off-market transfer. This is a direct move between two demat accounts that does not go through the stock exchange.

Gifting securities is essentially an off-market transfer in which investments are moved from one demat account to another without being sold on the exchange. “Investors can gift shares, ETFs, mutual funds held in demat form and other eligible securities, provided the holdings are free from pledges, lock-ins or other transfer restrictions,” said Yashas Khoday, co-founder and chief product officer, FYERS, a discount broker.

Some brokers let you gift directly from your holdings, provided the recipient has an account with the same broker. The process typically starts with selecting the holdings and quantity, followed by entering the recipient’s details. For any such transfer, the recipient must first be added as a beneficiary in the sender’s account, using their Permanent Account Number (PAN) or 16-digit demat account number.

You can also do this directly by registering for CDSL Easiest or NSDL Speed-e. If you are doing it directly, the recipient's account need not be with the same broker.

“If the recipient holds a demat account with another broker, the sender can use CDSL Easiest to initiate an off-market transfer. This involves registering for the facility, linking the recipient's demat account, selecting the securities and quantities, specifying gifting as the reason for transfer and completing the required authentication. Transfers to NSDL accounts can also be initiated through the inter-depository transfer mechanism,” Khoday added.

DIS-method

The sender must fill in a delivery instruction slip (DIS) and submit it to the broker. DIS will include details such as the recipient's and sender's names and depository participant (DP) IDs, the client ID, the number of shares to be transferred, and so on. The transfer date must also be mentioned.

Once you submit the DIS, the transfer will be executed on the date mentioned, and the shares will be credited to the recipient’s demat account. Here too, the recipient must be first added as a beneficiary in the sender’s demat account, either online or by submitting a form to the broker.

Mutual funds in SoA form

Many mutual fund investors hold units in SoA (Statement of Account) form, in a folio directly with the fund house. Until recently, these units could be gifted only after they were converted to demat. That is no longer needed, and the units can be transferred to non-relatives too.

Both the giver and the recipient need a folio with ‘validated’, update your KYC first. This can be checked on the CAMS or KFintech website using PAN. If the status shows anything other than ‘validated’, update your KYC first. Otherwise, the transfer request will be rejected.

The recipient must have a folio with the same fund house. If they don’t have one, they can open a zero-balance folio to receive the units.

To begin, visit the CAMS, KFintech or MF Central website and look for the ‘Transfer of MF Units’ tab. Enter your PAN, mobile number and email ID to check eligibility, and complete OTP authentication. You also need to specify whether the units are going to a relative, to a third party, or as a gift.

Next, select the fund house, folio and scheme, and the number or percentage of units to be transferred. The Registrar and Transfer Agent (RTA) checks that the units are free of lock-ins, freezes or liens. Then enter the recipient’s PAN, folio number, email ID and mobile number.

The transfer typically happens within two working days. Units move on a first-in, first-out (Fifo) basis, so the oldest units go first. To protect against fraud, the transferred units are locked from redemption for ten days.

Taxation

The tax impact depends on the following.

“If the recipient is a non-relative, the taxation happens at two levels. If the value of the financial asset exceeds ₹50,000, it is considered as income from other sources, where the recipient is taxed at the applicable slab rate. The market value on the transfer date acts as cost of acquisition for calculating capital gains when the recipient finally sells the asset,” explained Balwant Jain, a Mumbai-based tax and investment expert.

“If the recipient is a relative, there is no tax on receipt of the financial asset, regardless of the value. However, the original cost of acquisition of the gift giver continues as the cost of acquisition for the recipient,” he added.

When the recipient eventually sells the investment, capital gains tax will apply.

Investors must remember there is a grandfathering clause for equity mutual funds, as long-term capital gains tax on equities came into force in 2018. “Equity mutual funds bought on or before 31 January 2018 have a special rule. Gains made up to that date are not taxed, so their value on 31 January 2018 can be used as the purchase price if it is higher than what was originally paid,” Jain said