Use a minor's demat account for children under 18 If you have a minor, you cannot directly transfer mutual funds or shares to them. You will need to open a minor demat account with them in your name or that of another guardian as the operating participant. Most brokers have no issues with this as you can use your child's PAN card and birth certificate. After opening the account, you can transfer shares or units of mutual funds through off-market transfer using a Delivery Instruction Slip (DIS).
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Ensure the gift deed is correctly executed For the transfer to qualify as a gift and be exempt from capital gains tax when transferred, mutual fund or stock transfer needs to be evidenced by a written gift deed. The deed must clearly indicate names of the donor and recipient, relationship, type of gift (stocks or mutual funds), and date. Notarising is optional but a further layer of legal security if the amount is enormous.
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No tax for children's gifts, but taxed otherwise from income No gift tax in India if the recipient is your children. But if you have gifted to a minor child, all income that accrues out of the gifted assets—such as dividends or capital gains—will be added to your income and taxed accordingly. But if the child is major, the income will be taxed in the hands of the child depending on his/her slab, which would be lower. Thus, gifting after 18 years can save tax.
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Use folio transfer or off-market transfer in mutual funds For mutual funds, most AMCs allow unit transfer through a ‘folio transfer’ process. You’ll need to fill a transfer request form and submit identity proofs for both parties. If the child is a minor, the transfer is to their guardian-operated folio. For stocks held in demat, an off-market transfer from your demat to the child’s demat account must be done using DIS—this involves mentioning the ISIN, quantity, and target account details.
Start SIPs on their behalf for long-term goals Instead of transferring existing holdings, you can start new SIPs in their name. This is particularly useful for long-term goals like education or wedding costs. You can invest in your name and name them as nominees, or create an account in their name if they are adults. This technique promotes financial discipline and even serves as a tool for educating them about investing.
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Nominate your child if gifting is not feasible at the moment If you do not want to gift the investments now but would also like to transfer them to your child some time in the future, ensure that you have nominated them in your mutual fund folios and demat account. It facilitates transmission on your death without any hassle of a will or succession certificate for low values.
