Transfer tax on shares, mutual funds: When it is tax-free and when it is not – explained

Investors are allowed to transfer equity shares or mutual funds to family members, but the tax treatment differs from that for transfers to non-family members. In general, asset transfers in India, such as sales or exchanges, are treated as capital gains and are taxable in the year of transfer.

Taxation on the transfer of equity shares or mutual fund holdings depends on whether the transfer is made to immediate relatives, such as spouse, parents or children, according to Sourabh Tyagi, an accounting analyst. In such cases, if the transfer is made without consideration, it is generally treated as a gift rather than a transfer, and no capital gains tax is applicable, he said.

This exemption falls under Section 47 of the Income Tax Act. An amendment to the Finance Bill 2024 (effective 1 April 2025) clarified that, for the exemption to apply, the transfer must be made strictly by gift, will, or irrevocable trust.

“However, if the transfer was made with any form of consideration involved, it will be treated as a normal transfer, and the capital gains will be taxable. For instance, if you sell the mutual funds to your brother, then it will be taxable,” Tyagi noted.

What documents must be maintained to avoid disputes?

To avoid tax notices or disputes in family transfers of shares or mutual funds, it is important to maintain clear proof of intent, ownership, and the transaction trail, according to Tyagi. If you are transferring the assets without consideration (as a gift), then you must keep a record of the following:

• Maintain a written and signed gift deed.
• Keep proof of relationship, such as birth certificates, family tree declarations, and other documents.
• Preserve PAN details of both the transferer and the recipient.
• Maintain bank statements and demat statements showing the transaction trail.
• Keep purchase proof in the form of contract notes (for equity shares).
• Retain mutual fund or broker statements.
• Record valuation proof: NAV on date of transfer (mutual funds) and market price on date of transfer (listed shares).
• Make sure to keep a record of the communication and income tax reporting in which you disclosed the gift.

How are transferred shares or MF units taxed if the recipient sells them?

When shares or mutual fund units are received as a gift, the holding period of the original owner is carried forward to the recipient for the purpose of determining whether the gain is short-term or long-term, Tyagi said.

So, when the recipient later sells the shares or units, the combined holding period is used to determine tax liability. This benefit applies only when the transfer is due to a gift, inheritance, or transfer without consideration.

For individuals with capital gains (stocks, mutual funds, property) in India, ITR-2 is the primary form used for filing returns. However, under the Income Tax Act, 2025, ITR-1 (Sahaj) can also be used to report capital gains, only if you are a resident individual with a total income under ₹50 lakh.

However, in ITR-1, the reported gain must be restricted to long-term capital gains (LTCG), not exceeding ₹1.25 lakh from listed shares or equity mutual funds. The provision does not apply to short-term capital gains (STCG).