How to Transfer or Gift Mutual Fund Units Between Demat Accounts: A Step-by-Step Guide

Mutual fund units represent a portion of ownership in a mutual fund scheme. They are electronic records, much like shares in a company. A Demat (Dematerialized) account is a digital repository for holding securities, including mutual fund units.

You can transfer mutual fund units between demat accounts, whether yours or those of family and friends. However, this process is highly tedious, involving offline, paper-based steps with no online alternative. As a result, holding MF units in demat form becomes quite disadvantageous. The only available method to gift mutual fund units to others is through the demat process.

Why Move Mutual Fund Units?

There are several reasons why you might want to move your mutual fund units from one Demat account to another:

• Consolidation: If you have multiple Demat accounts, consolidating your investments into one account can simplify management.
• Transfer of Ownership: You might want to gift or transfer your mutual fund units to someone else.
• Switching Brokers: If dissatisfied with your current broker’s services, you can transfer your investments to another broker.

Process of transferring MF units to your Friends/Family

Challenges of Holding MF Units in Demat Form	Cost & Tax Implications of the Transfer Process
Broker-related fees (e.g. annual demat maintenance charges) apply	Transfer charges are Rs.25 or 0.03% of transaction value per ISIN at Zerodha with 18% GST.
Broker-related fees (e.g. annual demat maintenance charges) apply	The recipient must manually adjust the acquisition price for accurate tax reporting.
It is hard to exit a bad broker. The DIS transfer process is slow & cumbersome.	If the value of the units exceeds Rs.50,000 a year, the non-family recipient must pay income tax on gifts.
Once in demat form, you cannot transact on RTA, MFU, MF  websites & MF central.	Family members do not pay income tax on gifts but pay capital gains tax when selling the transferred units.
Broker consent is needed to pledge MFs for loans against MF.
Cannot get capital gains statements from RTA.

Holding Mutual Fund Units in Demat Form: A Process with Drawbacks

Holding mutual fund (MF) units in dematerialized (demat) form offers a method for transferring or gifting units but comes with multiple disadvantages. The demat process is cumbersome, offline, and restrictive, making it less appealing to investors.

Let’s explore the significant drawbacks of holding MF units in demat form, why investors may want to avoid it and understand the process in detail.

The Cumbersome Dematerialization Process

The dematerialization process is the first challenge in gifting MF units through the demat mode. Separate demat accounts must be opened for both the transferor and the transferee. If the units are held as a statement of account (SoA), they must be converted into demat form.

Steps for Dematerialization:

• Open demat accounts: The transferor and transferee need demat accounts to initiate the transfer.
• Filling out forms: A “mutual fund dematerialization form” is filled out with details such as the fund name, folio number, and units to be dematerialized.
• Processing time: It typically takes 3-4 business days to complete the dematerialization process.

While it seems straightforward, this process is both time-consuming and inconvenient, especially for investors used to a more digital-first approach.

The Delivery Instruction Slip (DIS): A Tedious Requirement

After the dematerialization, the transferor must fill out a Delivery Instruction Slip (DIS) to initiate the transfer. The form contains critical details about the transferor and transferee, including the ISIN (International Securities Identification Number) and the Beneficial Owner Identification (BOID) codes.

Key Details in the DIS:

• ISIN Number: Each mutual fund unit has a unique ISIN that needs to be mentioned.
• BOID Information: The transferor and transferee’s demat account details must be filled out.
• Quantity: The number of transferred units expressed in figures and words.

Any errors or corrections on the DIS require counter-signatures, making the process even more cumbersome. The slip must then be submitted to the broker or depository participant (DP) in person or via courier, further complicating the process.

Submission and Verification Process

The submission of the DIS to the broker kicks off a lengthy process that includes document verification. In addition to the DIS, additional documents like the Client Master Report (CMR) are required for verification purposes.

For larger transfers (above ₹5 lakh), additional steps may be required, such as video and OTP verification, making the process even more time-consuming. Brokers may also call or email to confirm the details, adding an extra layer of complexity.

Potential Delays:

• Video verification: High-value transactions may require video verification, further delaying the process.
• Courier Delays: The need to send physical documents often leads to logistical delays.
• Bureaucratic issues: The broker can experience delays in approving details like BOID and ISIN.

Such delays mean the entire process can take weeks or even months, especially if logistical or administrative issues arise.

High Costs Associated with the Transfer

Another significant drawback is the cost of transferring MF units through the demat form. Brokers charge fees based on the transaction value, and there are additional taxes like stamp duty.

Associated Costs:

• Transaction fees: Zerodha, for example, charges 0.03% of the transaction value or ₹25 per ISIN, whichever is higher.
• GST and Stamp Duty: 18% GST is levied on transaction charges, and a stamp duty of 0.015% is payable on transfers.

These costs can add up for large transfers, further discouraging investors from using the demat form to hold MF units.

Tax Implications for Gifted Mutual Fund Units

Transferring MF units to a family member has no immediate tax implications unless the transferee sells the units; at this point, capital gains tax may apply. In transfers to non-family members, if the value exceeds ₹50,000, it may trigger a tax liability for the recipient.

Capital Gains Considerations:

• Adjusted acquisition price: The transferee must manually adjust the acquisition price in their demat account to match the original price paid by the transferor.
• Tax discrepancies: Failure to report the correct acquisition price could lead to issues during tax audits.

Proper documentation is crucial to avoid tax-related problems, making the process more burdensome.

The inflexibility of Holding Units in Demat Form

Once the units are dematerialized, they can only be transacted through the broker’s platform. This limits investors’ flexibility, as they can no longer use multiple platforms such as the RTA portals, AMC websites, or MF Central. This restriction can frustrate investors who value the freedom to choose from multiple transaction platforms.

Lack of Flexibility:

• Limited to broker’s platform: Transactions can only be completed through the broker, limiting options.
• Difficulty in exiting broker relationships: If the broker’s service deteriorates, switching or exiting the relationship becomes challenging.
• Loan complications: Obtaining a loan against mutual funds in demat form requires a no-objection certificate from the broker, who might take the opportunity to cross-sell other loan products.

This lack of flexibility is a significant disadvantage, especially compared to the ease of transacting with units held in SoA form.

Rematerialization: Reverting to SoA Format

Investors seeking more flexibility may opt for rematerialization or converting demat units back into the SoA format. While this process is possible, it involves filling out additional forms and waiting for approval from the AMC or RTA.

Check out our Stock Screener page!

Rematerialization Process:

• Filling out forms: A rematerialization request form (RRF) must be completed and submitted.
• AMC processing: The AMC or RTA processes the request, issuing an SoA reflecting the investor’s holdings.
• Processing time: This can take weeks, depending on the accuracy of the information provided.

Although rematerialization is free, some brokers may charge nominal handling fees, which can further inconvenience the investor.

Conclusion: Why Avoid Holding MF Units in Demat Form?

The many disadvantages of holding mutual fund units in demat form—ranging from high costs and inflexibility to cumbersome processes—make it a less attractive option for investors. By contrast, holding units in SoA form allows for greater flexibility, enabling transactions across various platforms and avoiding the fees and delays associated with demat holdings.

Investors should carefully weigh these factors before deciding whether to hold their mutual fund units in demat form, especially if they value flexibility and ease of use.

*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ