Gift MF units to avail basic exemption limit

I met my old school friend Hemant at the school reunion. As we excitedly caught up with each other's lives conversation naturally turned to our children. Hemant told me that his daughter had secured admission to Georgia Tech university, US. It had been Hemant's dream that his daughter would qualify from this university and he had saved for this dream goal right from the time his daughter had been born. Being a conservative investor he had been building this up over time in bank fixed deposits. "The returns were steady but I had to pay very high taxes "he complained. That was till he met an investment adviser about four years ago. The adviser convinced him to shift the bank FDs into AAA-rated debt fund and choose the growth option of the scheme. It would give him returns similar to bank FD but he was spared the tax payment year after year. The adviser had also told him that on withdrawal after 3 years the tax treatment would be favourable as the gains would be taxed as long term capital gains and that too after providing for indexation benefit. Hemant had liked the advice and had shifted the entire bank FD amount of around Rs 35 lakh to a debt mutual fund.

Hemant mentioned that his investment of Rs 35 lakh in a debt fund four years ago had grown to around Rs 50 lakh today. He was planning to withdraw the amount soon to pay for his daughter's education expenses. Hemant's tax advisor has run the numbers for him and confirmed that the long-term gains tax payment on Rs 15 lakh would only be around Rs 50,000/- which is hardly 4% of the gain amount. His investment adviser had been right when he had recommended this conservative investment in a debt fund with very low capital gains tax pay-out. But Hemant was not satisfied. He wanted to know whether there was a legal way to save on this tax of Rs 50,000 also.

I confirmed with him that his daughter was a major (above 18 years) and that she was a student with no income at all in her own name. I advised him to gift the mutual fund units to his daughter. His daughter could then redeem it when she needed it for her education. There would be no tax on the gift by him to his daughter. The capital gains in her case would be calculated based on the cost incurred by Hemant and the time for which the units were held by Hemant would also be counted. In other words, the capital gains that would be taxable in her hands would be the same as if it had been continued to be held by Hemant. The only difference would be that the basic exemption limit of Rs 2,50,000 would be available to her which is not the case with Hemant. Since the calculated capital gains tax was lower than the basic exemption limit of Rs 2.50 lakh the tax payable would be nil. This is a perfectly legitimate way to save this tax amount of Rs 50,000. In any case this was to be a gift from the father to the daughter towards her educational expenditure. This was just gifting the actual mutual fund units rather than the money realised from the redemption of the mutual fund units that was leading to the saving of the income tax. In fact if you have invested monies specifically for your children's needs it will make sense in most cases to gift it to your children to enjoy the benefit of lower income tax.

Hemant wanted to know if it was possible to gift mutual fund units and if so, the procedure for gifting of mutual fund units. I informed him that it was possible to gift mutual fund units and he should contact his investment advisor or the specific mutual fund house for understand the gifting formalities.

...& ANALYSIS

• Shifting the bank fixed deposit into AAA-rated debt fund, may help in saving taxes despite steady returns
   
• Since the calculated capital gains tax was lower than basic exemption limit, the tax payable will be nil
   
• Gift the money saved to be investing for children, so that they can enjoy the benefits of lower income tax
   
• It is possible to gift mutual fund units with the help of an investment advisor to know the procedure