Gifting an SIP to your sister this Raksha Bandhan? Rules, tax traps and how to do it the right way
Gifting a Systematic Investment Plan (SIP) can be a thoughtful financial present for occasions such as Raksha Bandhan. However, mutual fund regulations and income-tax rules in India prescribe a specific structure for such transactions to ensure compliance and determine the applicable tax treatment.
How can a brother gift an SIP to his sister?
If your sister is an adult and the mutual fund folio is in her name, you generally cannot arrange for the SIP instalments to be debited directly from your bank account.
Mutual funds follow third-party payment restrictions. This broadly means that payments for an investment should come from the bank account of the first-named investor. In the case of a joint bank account, the first holder of the mutual fund folio must also be one of the joint account holders.
The simpler approach is to gift the money to your sister and allow her to invest it through an SIP from her own bank account.
For example, a brother can transfer ₹5,000 every month to his sister’s bank account, after which she can invest that amount through an SIP. Alternatively, he can gift ₹60,000 at the beginning of the year, allowing her to set up a ₹5,000 monthly SIP using her own account.
Whose name will the SIP be in?
The SIP and mutual fund investment will be in the sister’s name. She must complete the required KYC formalities and have a bank account in her name. If she does not already have a mutual fund folio, one can generally be created when she makes her first investment.
Once the money is gifted and subsequently invested, the mutual fund units belong to the sister.
Does the sister have to pay tax on the gifted money?
No. Money received by a sister as a gift from her brother is generally exempt from tax, irrespective of the amount.
While certain monetary gifts can be taxable in the hands of the recipient under the Income-tax Act, there is an exclusion for money received from specified relatives. Brothers and sisters fall within this definition. The fact that the gifted money is later invested in a mutual fund SIP does not alter the tax treatment of the original gift.
Capital gains
Once the money has been validly gifted, it becomes the sister’s property. Therefore, when she redeems the mutual fund investment, any applicable capital gains tax would generally arise in her hands.
Is a gift deed necessary?
There is no mandatory requirement under the Income-tax Act to execute a gift deed for such a transaction. However, for larger amounts, maintaining a gift deed or even a written gift letter can be helpful.
Such documentation may help establish that the transfer was genuinely intended as a gift if questions arise during tax assessment or scrutiny.
If sister is a minor
The rules differ when the beneficiary is a minor.
A minor must be the sole holder of the mutual fund investment, while the folio is operated by a parent or a court-appointed legal guardian.
Under AMFI’s third-party payment rules, certain exceptions are available for payments made on behalf of a minor by parents, grandparents or a “related person” as a gift or out of natural love and affection. Such third-party payments are permitted up to ₹50,000 for each regular purchase or per SIP instalment, subject to applicable KYC requirements and submission of the prescribed third-party payment declaration. This ₹50,000 limit does not apply when the payment is made by the registered guardian of the minor’s folio.
For this purpose, a “related person” includes a person investing on behalf of a minor out of natural love and affection or as a gift.
The gift received from a brother remains tax-exempt. However, income subsequently generated from the investment may be clubbed with the income of the relevant parent for income-tax purposes.
