Transferring investments like stocks or mutual funds to your children can be a meaningful way to secure their financial future and build wealth that lasts for generations. While the process is legal and straightforward, it requires following specific rules to ensure smooth transfer, tax efficiency, and compliance with regulations. Here’s a comprehensive guide.
1. Opening a Minor’s Demat Account
If your child is under 18, you cannot directly hold investments in their name. Instead, a minor’s demat account must be opened with a parent or legal guardian as the account operator. To set this up, you’ll need the child’s PAN card and birth certificate. Once the account is active, shares or mutual fund units can be moved through an off-market transfer using a Delivery Instruction Slip (DIS).
2. Executing a Proper Gift Deed
To legally classify the transfer as a gift—and avoid capital gains tax at the time of transfer—a written gift deed is essential. The deed should clearly state the names of the donor and recipient, their relationship, details of the gifted asset, and the transfer date. While notarisation is not mandatory, it provides additional legal protection, particularly for large-value gifts.
3. Tax Implications of Gifting to Children
Gifts to children are exempt from gift tax in India. However, if the child is a minor, any income earned from the gifted asset—such as dividends or capital gains—will be taxed in the parent’s income. In contrast, if the recipient is an adult child, the income is taxed in their hands, potentially at a lower rate. This makes gifting after the child turns 18 a tax-efficient strategy.
4. Transfer Procedures for Mutual Funds and Stocks
For mutual funds, asset management companies (AMCs) typically allow a folio transfer. This requires a transfer form along with ID proofs of both parties. If the child is a minor, the folio will be operated by the guardian until they come of age. For stocks, the process involves an off-market transfer from the donor’s demat to the child’s demat account, specifying the ISIN, quantity, and target account details in the DIS.
5. Starting SIPs in the Child’s Name
Instead of transferring existing holdings, parents can consider starting fresh Systematic Investment Plans (SIPs) for their children. This approach works well for long-term financial goals such as education or marriage expenses. SIPs can be started in the parent’s name with the child as the nominee, or directly in the child’s name if they are an adult.
6. Using Nomination as an Alternative
If you’re not ready to gift the investments now, nominating your child in mutual fund folios and demat accounts ensures the assets pass to them smoothly in the event of your demise. For smaller values, this eliminates the need for a will or succession certificate, making the transmission process hassle-free.
Bottom Line
With proper planning, gifting investments to children is a powerful way to create a lasting financial legacy. By following the right legal procedures and understanding tax implications, parents can ensure their wealth benefits the next generation without unnecessary complications.
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Mariya is the Senior Editor at Juris Hour. She has 5+ years of experience on covering tax litigation stories from the Supreme Court, High Courts and various tribunals including CESTAT, ITAT, NCLAT, NCLT, etc. Mariya graduated from MLSU Law College, Udaipur (Raj.) with B.A.LL.B. and also holds an LL.M. She started as a freelance tax reporter in the leading online legal news companies like LiveLaw & Taxscan.
