I want to transfer all the mutual funds I have been investing in for the past 10 years to my father. Currently, he is a nominee in most of them. How do I transfer these without any tax implications as the gains for these would be substantial?
Amit Maheshwari Tax Partner, AKM Global: As per Section 47 of the Income-tax Act, 1961, any capital asset transferred as a gift shall not be considered a transfer. Since mutual funds are considered capital assets, transferring them to your father as a gift will not be treated as a transfer and, therefore, you will incur no tax liability on this transfer. Additionally, as per Section 56(2)(x) of the Act, any property received without consideration or for inadequate consideration from a ‘relative’ is exempt from tax. Notably, mutual funds are covered under the definition of property, and the term ‘relative’, inter alia, includes a father. Therefore, the mutual funds received by your father will be considered a gift and will be exempt from tax. Consequently, neither you (transferer), nor your father (transferee) will incur any tax liability on this transfer. However, when your father subsequently decides to sell the mutual funds, he will be liable to pay capital gains tax on the sale. Please note that the cost of acquisition for him will be the same as the original cost of acquisition incurred by you (cost to the previous owner), and the holding period will also include the period from the date you purchased the mutual funds. Since the holding period of the mutual funds exceeds 12 months, the sale will result in a long-term capital gain (LTCG). Hence, on the sale of mutual funds, your father will be liable to pay tax on LTCG exceeding Rs 1,25,000 at the rate of 12.5% under Section 112A of the Act.
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