How are inherited mutual funds taxed?

What is the tax treatment of mutual fund units received through transmission? For capital gains calculation, will the acquisition date be considered as the original purchase date or the date of transfer? - Thirumala Rao J

When mutual fund units are inherited due to the death of the original investor, this process is known as transmission. Transmission does not trigger any immediate tax liability for the recipient, as the mutual fund units are transferred, not sold.

For capital gains calculation, the original purchase date and purchase price of the deceased investor are considered.

Taxation on sale of inherited mutual fund units

Equity mutual funds

• Gains up to Rs 1.25 lakh in a financial year are tax-free.
  
• Long-term capital gains (LTCG) (holding period over one year) above Rs 1.25 lakh are taxed at 12.5 per cent.
  
• Short-term capital gains (STCG) (holding period of one year or less) are taxed at 20 per cent.

Debt mutual funds

• If the original investment was made on or after April 1, 2023: The entire capital gain is added to the investor's income and taxed according to the applicable slab rate.
  
• If the original investment was made before April 1, 2023:
  
• Sold within 2 years: Gains are added to the investor's income and taxed as per their slab rate.
  
• Sold after 2 years: Gains are taxed at 12.5 per cent.

Suppose an investor purchased equity mutual fund units on January 1, 2019, for Rs 5 lakh. The investor passed away in January 2024, and the units are inherited by their child. The child then sells these units in March 2025 for Rs 12 lakh.

• Since the original purchase date (January 1, 2019) is considered, the holding period is over one year, making the gains long-term capital gains (LTCG).
  
• The capital gain is Rs 7 lakh (Rs 12 lakh - Rs 5 lakh).
  
• The first Rs 1.25 lakh is tax-free.
  
• The remaining Rs 5.75 lakh is taxed at 12.5 per cent, leading to a tax liability of Rs 71,875.

Quick recap

Transmission of mutual fund units does not result in an immediate tax. However, when the recipient eventually sells the units, taxation is based on the original purchase date and cost.

Also read: Why pay more tax when marginal relief is there?

This article was originally published on March 20, 2025.