Explained: How You Can Save Huge Taxes On Your Mutual Fund Gains With This SEBI Tweak

A recent regulatory tweak by the Securities and Exchange Board of India (SEBI) can help investors save a significant amount in taxes. Mutual funds have become preferred investment instruments for investors aiming for higher returns. However, capital gains taxes on mutual fund returns remain a major concern for investors. Now, you can reduce your tax liability on mutual fund profits with a SEBI-approved process.

Investment advisor Ashish Kumar Meher, in a post on X, has outlined what he describes as a little-known but effective way for investors to reduce tax liability on mutual fund gains through the SEBI-approved provision that allows investors to gift their mutual fund units to eligible relatives.

Meher said, “Most investors in India don’t know this, but you can save huge tax on your mutual fund profits with one simple SEBI-approved trick.”

He added that the regulation is entirely legal and remains underused despite its potential benefits.

Meher explained that SEBI now permits investors to gift mutual fund units to specific family members. The tax advantage applies when these relatives fall under lower-income categories. As he put it, “Gift your mutual funds to a family member or relative who has very low capital gains,” and when they redeem the units, “profit up to Rs 2.5 lakh per year is taxed at zero under the new tax regime.”

He further said the benefit can be even bigger in some cases and “if their total income is low, even up to Rs 12 lakh profit can be tax-free.”

Importantly, the holding period of the investment remains intact upon the transfer of units. This preserved holding period allows the investor, or in this case, the recipient, to benefit from long-term capital gains treatment.

Meher also highlighted that gifts to specified relatives are absolutely tax-free as per the rules of income tax, making the whole process both legal and effective. For investors stuck with older or underperforming portfolios, he said, “This one rule can reduce your tax to zero in many cases.”

“Gifts to specified relatives are fully tax free. It works beautifully for your dead or non-performing funds too, helps you book profits without triggering high tax in your own name,” he added.

The strategy, he said, can be particularly effective for the long-term investor desiring to exit legacy positions.

“Long-term investors can exit old positions with almost zero tax,” Meher wrote, adding that families could “legally plan taxes by distributing gains.” He emphasised that this approach allows people to avoid paying “unnecessary tax on funds you were anyway planning to exit.”

Another key advantage would be the ease of execution. Meher described the process as requiring “zero paperwork other than a simple transfer request to your AMC or broker.”

According to him, the method is particularly suited for retirees, homemakers, students or other relatives with low-income levels.

But he said one should be careful about the eligibility rules, and that the provision applies to only the family members defined as “eligible relatives” under income tax law. “Only gifts to eligible relatives as defined under Income Tax rules,” he said, adding that the complete list of categories admissible needs to be checked to ensure compliance.

Meher referred to it as “one of those rare legal provisions that saves retail investors real money,” adding that most investors are not aware of its existence. “Most people never use it,” he said, adding that the rule remains a largely untapped opportunity for effective tax planning.

The post highlights a broader point about financial literacy: Knowing regulatory nuances can translate into meaningful savings, especially for households looking to structure their investments more efficiently.