« Home Loan Rate Hiked? How Much Prepayment should you make to Keep EMI and Tenor Same? Sweep FDs: An Easy Way to Keep Your Money Liquid and get High Interest Income »

What is the biggest benefit of holding mutual fund units in demat form?

Posted on 01 Nov 2023
Author: Sayan Sircar

Tags: Mutual Funds ; Tax

8 mins read
📢Join 2300+ readers on WhatsApp and get new post notifications!

This articles discusses some benefits and drawbacks of storing your mutual funds in demat mode with one killer feature that makes transmission possible.

What is the biggest benefit of holding mutual fund units in demat form?

This article is a part of our detailed article series on the concept of mutual fund taxation in India. Ensure you have read the other parts here:

How to calculate and save tax on mutual funds?

This article is expected to give investors in India a complete guide on the topic of calculation of taxes on mutual funds.

What should debt, international and gold mutual fund investors do now that these funds are taxable at slab rate?

This article shows the way forward for investors in debt, gold, hybrid and international funds which have lost indexation benefits on units purchased after 1st April 2023.

Pay lower capital gains taxes for debt mutual funds: understand how indexation works

This article shows you how the concept of indexation lowers the capital gains tax you pay when you sell debt mutual funds.

Which mutual fund has lower tax - international funds at 20 percent vs domestic at 10 percent?

This article settles the question of which type of capital gain calculation is better - debt-type funds taxed at 20% with indexation vs equity-type at 10%.

Pay lower capital gains taxes for equity: understand how grandfathering works

This article explains the concept of equity LTCG grandfathering in detail with multiple case studies and examples.

How to calculate taxes from capital gains and combine them with your other income

This article talks about understanding capital gains tax calculations and computing offsets vs other income.

How is tax calculated on selling shares/MFs and how do to do tax harvesting?

This post discusses the concept of tax calculations and tax harvesting in a simple manner.

📚 Topics covered:

What is the biggest benefit of holding mutual fund units in demat form?
Can you hold your mutual fund units in demat form at all?
What are the pros and cons of holding mutual funds in demat account?
One worked out example
Can you dematerialise your existing SOA MF units?

What is the biggest benefit of holding mutual fund units in demat form?

FAQ Demat Account MF Transfer

Source: https://nsdl.co.in/faqs/faq.php

You can transfer mutual fund units (and stocks or bonds) in your demat account to a family member, or anyone else for that matter, anytime using the off-market-transfer or online transfer mechanisms offered by CDSL or NSDL.

Can you hold your mutual fund units in demat form at all?

There is no benefit of holding an electronic item in a demat account

A lot of investors have been told a variation of the above statement since when they buy mutual funds, they no longer have physical unit certificates. The Mutual Fund Transfer Agencies (RTAs) like CAMS and KFintech maintain detailed statements for every mutual fund investor and the units they hold. This format is called Statement-of-Account (SOA) mode of holding mutual funds.

In contrast, just like shares, you now have the option of holding mutual funds in your demat account which will be maintained by NSDL or CDSL. You can use multiple platforms to buy and sell these mutual funds in demat form.

Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.

What are the pros and cons of holding mutual funds in demat account?

The main pros are a single statement view of stocks and MFs called CAS along with transactions and tracking via the same platform that you use for stocks.

The cons are being required to trade only in integral units of MFs and platform lock-in: you will need to transfer the units to another demat account to transact with another platform.

However, all of these pros and cons become inconsequential if you consider the transmission facility.

Normally, mutual funds in SOA form, i.e. not in a demat account, can be transferred only by:

selling which leads to capital gains tax
dying and then the nominee / legal heirs get the units after producing death certificate etc.

But, we know that for all assets,

Transmission to family members is tax free if it is a gift

We will explain below how to make use of this feature to save taxes while selling or transferring mutual funds.

One worked out example

You are the parent of a 18 year old who needs money for college education in 6 months. As a responsible parent you have most of the money for college admission already in debt mutual funds. However, if you sell those units in your name, you will be taxed at 30% or more if you are in highest tax slabs. However, if you transfer the units to your child’s demat account as a gift:

the child does not pay taxes on transmission
the child, being a major with their own PAN and tax filing status, does not have income clubbing with the parent
the child’s acquisition date and cost of the units is the same as that of the parent but the child is likely at a lower or zero tax bracket
the child sells the units to pay the college fees and pays a lot less taxes than the parent: How to calculate taxes from capital gains and combine them with your other income

It is best to create a gift deed on stamp paper and the parent who is making the gift should sign it

To understand the taxation better, we need to know that capital gains tax from the sale of mutual funds or stocks is taxed as per the original purchase date and purchase price. If the items being gifted are shares or mutual funds, or anything that has a purchase date and price, include those details in the deed for making it easy to calculate capital gains in the future.

For example, say the parent purchases ₹5L in mutual funds when the child is ten years old at ₹100/unit, gifts them to the child when they are 18+ when the fund NAV is at ₹200/unit, and the child sells them later at ₹250/unit. The tax will be calculated with the purchase NAV of ₹100 and the purchase date, for determining long term or short term holding, as of the original date more than eight years ago.

The only way the above transaction will save tax is because the capital gain from this sale if the capital gain can be offset against the basic exemption limit. To explain this, currently below ₹2.5L/year income, there is no tax due. Therefore, if the capital gain amount is below this basic limit, then there is no tax to be paid by the child.

Read more here:

There is another use case with retired seniors and their adult children which we will cover in a future article.

Can you dematerialise your existing SOA MF units?

Now that you know of this tax saving feature, you can follow this process to dematerialise MF units from SOA form:.

Step 1: Stop existing SIPs in the folios
Step 2: Fill the Demat Request Forms and send along with KYC documents to the DP
Step 3: DP will liaise with the RTA (CAMS or KFintech) and the process will be over in a month or so. There will be some nominal charges.

There are extensive FAQs on this process here:

NSDL site: https://nsdl.co.in/faqs/faq.php
NSE site: https://nsdl.co.in/nsdlnews/hold-mutual-fund-units.php

You can also convert demat MF units into SOA form in case you wish to do so for any reason.

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

To understand how this article can help you:

If you have a comment or question about this article

The following button will open a form with the link of this page populated for context:

If you liked this article, please leave us a rating

The following button will take you to Trustpilot:

Discover an article from the archives

Worked out case studies for goal-based investing

Case study: how can this middle-aged investor with two children plan for retirement and children's goals?

This article shows how a single-income middle-aged couple with two small children reach their retirement and children’s goals.
Case study: can this double income single kid family reach FIRE at 50?

This article shows how a double-income couple with a 2-year old reach their FIRE dream at the age of 50.
Case study: how a family in their mid-30s with a newborn kid can FIRE and invest in real estate?

This article shows how a double-income couple with a newborn child can invest for their future goals of FIRE and real-estate investment.
Case study: how this double income recently married family can perform DIY goal-based investment planning

This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
Case Study: How should couples in their 40s with a new baby plan their financial future?

Did you welcome a bundle of joy in your 40s? This article will discuss ways of planning the child’s (and your’s financial future)
Case study: how this double income single kid family can perform DIY goal-based investment planning

This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.

Previous and next articles:

<p>Home loan rate hike? You can prepay to keep EMI and tenor same. This post shows how.</p>

Loans House Purchase

Home Loan Rate Hiked? How Much Prepayment should you make to Keep EMI and Tenor Same?

Home loan rate hike? You can prepay to keep EMI and tenor same. This post shows how.

Published: 29 October 2023

9 MIN READ

<p>This articles explains the concept of how sweep FDs can help you earn higher interest rates while keeping your money liquid and safe.</p>

Choosing Investments

Sweep FDs: An Easy Way to Keep Your Money Liquid and get High Interest Income

This articles explains the concept of how sweep FDs can help you earn higher interest rates while keeping your money liquid and safe.

Published: 5 November 2023

6 MIN READ

Latest articles:

<p>This article shows how to understand the impact on your portfolio if you stop investing for a few years between today and retirement.</p>

Portfolio Construction

How much lower portfolio value do you end up with if you do not invest for a few years in between?

This article shows how to understand the impact on your portfolio if you stop investing for a few years between today and retirement.

Published: 24 April 2024

4 MIN READ

<p>This article explains what happens if you withdraw from your EPF to buy a house and who should or shouldn’t withdraw from EPF for this reason.</p>

House Purchase

Should you withdraw from your EPF to buy a house?

This article explains what happens if you withdraw from your EPF to buy a house and who should or shouldn’t withdraw from EPF for this reason.

Published: 21 April 2024

7 MIN READ

Topics you will like:

Asset Allocation (21) Basics (8) Behaviour (12) Budgeting (12) Calculator (25) Case Study (6) Children (17) Choosing Investments (40) FAQ (12) FIRE (13) Gold (21) Health Insurance (5) House Purchase (29) Insurance (16) International Investing (12) Life Stages (2) Loans (17) Market Data (7) Market Movements (16) Mutual Funds (46) NPS (7) NRI (19) News (18) Pension (8) Portfolio Construction (53) Portfolio Review (27) Reader Questions (8) Real Estate (7) Research (5) Retirement (38) Review (15) Risk (6) Safe Withdrawal Rate (5) Set Goals (28) Step by step (15) Tax (59)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.