A Systematic Investment Plan (SIP) can be a practical financial gift for siblings on occasions such as Raksha Bandhan. However, gifting mutual fund investments comes with specific rules on how the investment can be transferred, who can receive it and how it will be taxed. Understanding these rules can help siblings structure the gift correctly while avoiding tax compliance concerns.
Here, we answer the key questions on gifting SIP investments, including the rules and tax implications siblings must know -
Can you directly gift SIP to your sibling?
You cannot directly fund a SIP on your sibling's name from your own bank account due to mutual fund third-party payment regulations. According to third party regulations, all payments made for a mutual fund investment must be done from the bank account of the first-named investor. In case the payment is made via a joint bank account with a sibling, the first holder in the mutual fund folio must be one of the joint holders of the bank account used for payment.
If you want to still gift SIP to your sibling, a simpler way would be to gift the money to your sibling and let them invest from their own bank account. For example, you can transfer Rs 10,000 each month to your subling's bank account, which can be invested in SIP monthly. Or, you can send Rs 1,20,000 to your sibling at the beginning of the year, where they can invest Rs 5,000 every month on SIP from their own account.
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Will your sibling pay tax on your gift?
Typically, money received as a gift from siblings is exempt from tax, despite the amount. Notably, some monetary gifts may fall under tax bracket for recipient under the Income-tax Act. However, the Act excludes specified relatives, including brothers and sisters. The tax treatment of the original gift remains unchanged even if the gifted money is subsequently invested in a mutual fund through an SIP.
Whose name will the SIP fall under?
Your SIP gift will officially fall under your sibling's name. They will be required to finish the necessary KYC formalities and must have a bank account in their name. In case your sibling does not have a mutual fund portfolio already, a new one can be made as they make initial investment. After money is invested, the mutual fund units belong to your sibling.
What happens to capital gains?
After the gift is legally transferred, the money belongs your sibling. Hence, any capital gains arising when they redeems the mutual fund investment would generally be taxable.
What to do if your sibling is minor?
In case your sibling is a minor, they must be the sole holder of the investment, while the account is operated by parents or legal guardians. AMFI's third-party rules provides some exceptions to payments made by parents or related person on behalf of minor as a gift. Under this rule, payments are allowed up to Rs 50,000 per SIP instalment, based on applicable KYC requirements and third-party payment declaration.
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