Can You Transfer Mutual Funds? Discover the Surprising Offline Method Hidden in Plain Sight!

Are you looking to gift Mutual Fund units to your loved ones or simply consolidate your investments rejigging holdings between different accounts? Did you know that you can transfer or gift Mutual Fund units between Demat accounts?

The latest episode of Mint Money Shots, presented by Invesco Mutual Fund, saw Deputy Editor at Mint, Neil Borate, walk through the process of transferring Mutual Fund units between Demat accounts, along with listing out key steps and tax implications so you can do it smoothly, whether for family or friends. Watch the full episode below,

“Transferring mutual fund units between Demat accounts allows you to move investments between your own accounts or even gift them to loved ones. However, this process is offline and can be a bit cumbersome. Currently, the only way to give mutual fund units is by holding them in Demat form,” said Borate.

Demat account is a prerequisite

Before you can initiate any transfer, both the transferor and the transferee need active Demat accounts. If your units are currently held in physical form or as a Statement of Account (SOA), you will need to dematerialise them. For this, you would need to contact your Depository Participant (DP) or broker to initiate the process.

Read on for a step by step guide for dematerialising your Mutual Fund units. First, fill out a dematerialisation form. This form is available from your depository participant, DP or broker, and requires details like the Mutual Fund name, folio number and units to be dematerialised.

Next, submit the necessary forms and allow 3-4 business days for the conversion to be completed. After this, the units will appear in your Demat account. “This conversion is necessary because only demat units can be transferred between accounts. So make sure your units are in Demat form before moving to the next step,” Borate said.

Preparing for transfer

• Obtain a Delivery Instruction Slip (DIS): This form is available from your broker or DP.
• Gather necessary details:
• ISIN number of the mutual fund units. This is the unique identifier for the mutual fund units found on your account statement
• Transferor and transferee details (DP ID and Client ID of your Demat account and that of the recipient)
• Quantity and number of units to be transferred. This must be mentioned both in numbers and words
• Reason for transfer (such as gift to family, transfer between personal accounts)
• Verify unit status: You must ensure that the units you wish to transfer are free and not subject to any lock-in periods. For example, in the ELSS scheme or retirement fund or Children’s Fund, they are locked.
• Avoid overwriting: Be sure to avoid any overriding on the DIS form. “If a correction is necessary, the form needs a counter signature next to the change,” he explained.

Submitting the application and tracking

After completing all the steps, you can submit the DIS slip to your broker’s office in person or by courier. Some brokers may ask for additional verification. “You may need to include a client master report or CMR for verification. For transfers valued above ₹5 lakh, additional verification like a video call might be required,” he said.

The transfer process typically takes 1-2 business days, although some brokers may experience logistical delays. “Factors like mailing delays or form rejections can extend the process to a few weeks or even months in some cases. Logistical delays may occur while couriering the physical DIS slip to your broker. But, once received by the broker, the transfer should take only a day or two business day” he further added.

Understanding costs and tax implications

The process of transfer from one Demat account to another comes at a cost. A transaction fee (typically 0.03% or ₹25, whichever is higher) plus 18% GST is levied. In addition, a stamp duty of 0.015% applies to all transfers. For larger transfers, these fees can add up.

Tax implications are different for family transfers vs non-family transfers. Within the family, gifts to specified relatives under the Income Tax Act are generally exempt from income tax regardless of the amount. However, the recipient will be liable for capital gains tax when they eventually sell the gifted Mutual Funds units.

In case the transfer is made to non-family members, if the gift exceeds ₹50,000 in a financial year, the recipient will be taxed on the entire value received. Similar to family transfers, the recipient will be also liable to also pay capital gains tax when they eventually sell the gifted Mutual Fund units.

Need for re-materialisation

If you find managing Demat accounts restrictive, you can rematerialise your units, converting them back to SOA form. This allows for greater flexibility in managing your investments and can bring down transaction costs.

“Proper documentation, including a gift deed, is essential to ensure accuracy during future audits. You can rematerialise units to convert them back to SOA form. This involves filling out a Rematerialisation Request Form (RRF) and submitting it to your broker or DP, who forwards it to the AMC for processing. Once you complete it, your mutual fund units return to SOA which allows for more flexibility to transact on multiple platforms and bypasses the broker,” Borate said.

There are several gains from Rematerialisation. It saves you from annual Demat account charges and other broker costs. “It may be preferable if you plan to manage your investments independently. Holding Mutual Funds in Demat form limits your ability to transact on platforms other than your brokers, potentially increasing transaction costs and limiting access to certain features. By contrast, SOA format allows transactions on free platforms like MF utilities, MF Central and the AMC websites. Holding units in SOA form provides more freedom and can reduce transaction costs,” he said.

Key takeaways

• Transferring mutual fund units between Demat accounts can streamline your investment portfolio
• Understanding the process, associated costs, and tax implications is crucial
• Consider the advantages and disadvantages of Demat and SOA formats to determine the best option for your investment needs.

Disclaimer: Mint Money Shots is an editorial series, sponsored by Invesco Mutual Fund.