How to move your mutual fund units from one demat to another or gift them

You can transfer your mutual fund (MF) units from one demat account to another, either to your own or to those belonging to your family members and friends. However, this is an extremely cumbersome and paper-driven (offline) process with no online alternative. This makes holding MF units in demat form extremely disadvantageous. That said, the only way to gift MF units to someone is through the demat mode.

The dematerialization process

First, open demat accounts for the transferor and the transferee. "We get two demat accounts—one for the transferor and one for the transferee. If units are in physical form, they must first be dematerialized," explains Amit Sahita, director of Fincode Advisory Services Pvt. Ltd.

If the MF units are currently held as a statement of account (SoA), they must be converted to demat form. This requires filling out a ‘mutual fund dematerialization form’, available from the depository participant or broker. The form asks for important details such as the MF name, folio number, and the number of units to be materialized.

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The dematerialization process typically takes three to four business days.

The delivery instruction slip

Once the MF units have been dematerialized, the transferor must fill out a delivery instruction slip (DIS) to initiate the transfer. It can be obtained from your broker. The DIS requires important information, including:

ISIN number: The International Securities Identification Number (ISIN) of the MF units mentioned in the account statement.

Transferor's details: The depository participant's ID and Beneficial Owner Identification (BOID), a 16-digit alphanumeric code that identifies the beneficial owner of securities in a demat account.

Transferee's details: The depository participant's ID and the transferee’s BOID. Note that this can also be a self-transfer with your own details as the transferee.

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Quantity: The number of MF units being transferred in figures and words.

The transferor must also select the reason for the transfer (e.g., family transfer, gift) on the DIS form. A counter-signature is required in case of corrections or overwriting on the DIS.

The submission

The DIS, along with supporting documents like a Client Master Report (CMR) for verification, must be submitted to the transferor’s DP or broker. You can visit the broker's office or send the documents via courier.

For transfers above ₹5 lakh in value, additional verification, such as video verification, may be required.

Video and OTP verification

Once the broker receives the DIS, they will verify the details over a call or email to confirm the authenticity of the transfer request. A video verification of the account holder may also be conducted for higher-value transfers. The verification process is usually completed within 48 working hours of receiving the DIS. Upon successful verification, the broker processes the transfer request.

Transfer completion

After the verification, the MF units are transferred from the transferor’s demat account to the transferee’s demat account.

A senior executive at a small brokerage told Mint that the whole process could take weeks or even months as there are delays, like BOID and ISIN approval at the end of the transferor's broker, and logistical challenges, such as mailing the DIS to the broker.

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However, Mohit Mehra, vice president at Zerodha, explains: "There could be logistical delays because you need to courier the DIS to the broker, but once the DIS has reached the broker, the transfer typically takes a day or two.”

Charges

A fee is levied. For example, Zerodha charges 0.03% of the transaction value or ₹25 per ISIN, whichever is higher, along with 18% GST. While this might seem nominal for small transactions, larger transfers could incur significant costs. A stamp duty of 0.015% is also payable on such transfers.

Tax

Chopra points out that no income tax is payable when transferring MF units to a family member without monetary consideration. However, a non-family recipient will be taxed if the value of the transferred shares exceeds ₹50,000. In the case of family members, the tax is levied when the transferee sells the units (capital gains tax). In this case the transferor's cost of acquisition is taken into account.

"The recipient must manually adjust the acquisition price in their demat account to match the original price paid by the sender. This is crucial for accurately calculating capital gains or losses," Chopra cautions.

Failure to report the correct acquisition price can lead to tax discrepancies during audits, and proper documentation is necessary to avoid issues with the tax authorities.

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Switching back to SoA: Rematerialization

Investors who prefer the flexibility of transacting on multiple platforms may consider rematerializing their MF units, i.e., converting them back to the SoA format. The process begins with filling out a rematerialization request form (RRF) and submitting it, along with the required documents, to the broker. The broker then forwards the request to the AMC or RTA for processing.

Once the request is processed, the AMC or RTA issues an SoA reflecting the holdings. The process may take a few weeks, depending on the accuracy of the information provided and the AMC’s processing time. While there are no charges for the rematerialization, some depository participants or brokers may charge a nominal handling fee.

Solution: Don't hold MF units in demat form

There are several challenges with holding MF units in demat form. One significant drawback is the reliance on the broker's platform for transactions. Once MF units are converted to demat form, one can no longer transact through RTA portals, MF Central, or AMC websites. One is left with only one option: transacting through the broker’s platform.

If the broker's service deteriorates, it is difficult to exit the relationship. Getting a loan against MF is also difficult: One needs a no-objection certificate from the broker to pledge MFs held in demat form. The broker generally uses this as an opportunity to cross-sell their own loan products.

Also, transacting through a demat account can introduce additional costs, such as annual account maintenance charges.

By contrast, holding units in SoA form gives investors freedom. They can transact in SoA format either through their broker platform or through multiple free platforms such as MF Utilities, MF Central, RTAs or AMC websites.