Smart Tax Saving Hack: Gift Mutual Funds and Reduce Your Income Tax Burden — Here's How It Works

If you’re looking for a smart and legal way to save income tax, here's a unique strategy recommended by tax experts: Gift mutual fund units to your relatives and potentially reduce your overall tax liability.

This method is gaining popularity among high-income earners, salaried professionals, and investors who wish to build wealth while staying tax-efficient. Let's break down how this works and how you can use it to your advantage.

🎯 What’s the Strategy?

According to the Income Tax Act of India, when you gift mutual fund units to your relatives, the gift is not taxable, regardless of its value.

Here’s what you need to know:

• Gifts to non-relatives are tax-free only up to ₹50,000 in a financial year.

• But gifts to defined relatives (like spouse, parents, siblings, or children) are fully exempt from tax, irrespective of the amount.

🧑💼 What Do Experts Say?

Tax and investment experts suggest that gifting mutual funds to a relative in a lower tax bracket can help reduce the family’s overall tax outgo.

Example:
If you gift ₹5 lakhs worth of mutual fund units to your wife (a homemaker with no taxable income), then any capital gains arising from the sale of these units in her name will be taxed according to her tax slab, which could be zero or significantly lower than yours.

This strategy helps distribute wealth within the family while minimizing tax.

📊 How Does It Work?

Here’s a step-by-step breakdown of how to gift mutual funds legally and efficiently:

Select a Mutual Fund: Choose a long-term investment like Equity Mutual Funds or ELSS for better capital gains treatment.

Prepare a Gift Deed: Draft a simple gift deed on stamp paper to document the transfer legally.

Transfer Units: Contact the mutual fund house or your broker to initiate the off-market transfer of mutual fund units. The recipient must have KYC-compliant details.

Tax Implication: Once transferred, any capital gain on these mutual fund units will be taxable in the hands of the recipient, not you.

💰 Who Should Use This Strategy?

• High-income earners who want to lower their tax liability.

• People with senior citizen parents, homemaker spouses, or students in their family.

• Those who want to do wealth planning within the family while staying tax-compliant.

🧮 Bonus: Combine with SIPs and Tax Exemption

You can combine this strategy with Systematic Investment Plans (SIPs). Gift SIPs to your children or parents, and let the money grow in their names. Later, when redeemed, the gains will be taxed in their name — often at lower or nil tax rates.

📌 Final Thoughts

Gifting mutual funds is more than just a gesture — it's a smart tax planning tool. By transferring mutual fund units to your immediate family members, you can:

• Reduce your capital gains tax burden

• Stay within legal limits of tax exemptions

• Grow wealth as a family unit

As always, consult your tax advisor or financial planner before making any major gifting or investment decisions to ensure everything aligns with current laws and your long-term financial goals.