Archive / Investment Adviser (Level 2) / Basics of Estate Planning

nism-series-xb-tax-free-gifting-mutual-fund-proceeds-parent-child[ INVESTMENT ADVISER (LEVEL 2) ]

In Practice Case 10, L's daughter faces an immediate financial emergency during L's lifetime. L has bequeathed her mutual funds to the daughter in her Will. How can L immediately and tax-efficiently provide these funds to her daughter today?

[ A ]The daughter can present a copy of the registered Will to the Mutual Fund AMC to redeem units immediately

[ B ]The daughter must apply for Probate in the High Court while L is alive

[ C ]L, as the registered sole unit-holder, must redeem the mutual fund units herself and gift the cash proceeds to her daughter, which is completely tax-free under Section 92(2)(m) as a gift from a parent[ CORRECT ]

[ D ]The daughter can execute a Power of Attorney to cancel L's mutual fund ownership

Takeaway

L must redeem the mutual fund units herself and gift the cash proceeds to her daughter, which is entirely tax-free as a gift from a parent under Section 92(2)(m) of the Income-tax Act, 2025 (the erstwhile Section 56(2)(x) of the Income-tax Act, 1961), so option C is correct.

Derivation

Since a Will has no legal effect during the testator's lifetime, L cannot let the daughter access the bequeathed mutual funds directly on the strength of the Will. Instead, L, as the sole registered unit-holder, must redeem the units herself and transfer the resulting cash as an inter-vivos gift to her daughter. Under Section 92(2)(m) of the Income-tax Act, 2025 (the erstwhile Section 56(2)(x) of the Income-tax Act, 1961), any sum of money received from a 'relative' — which specifically includes a parent — is fully exempt from tax in the recipient's hands, regardless of amount. This tests the practical workaround estate planners use to bridge urgent lifetime needs against an intended bequest, and the specific tax exemption that makes it costless.

Why the others fail

A — The daughter can present a copy of the registered Will to the Mutual Fund AMC to redeem units immediately

AMCs (Asset Management Companies) cannot honour a Will-based transmission request to redeem or transfer units while the primary registered investor is still alive.

B — The daughter must apply for Probate in the High Court while L is alive

A probate petition can only be filed in court after the testator's death and the production of a valid death certificate; it is not available during L's lifetime.

D — The daughter can execute a Power of Attorney to cancel L's mutual fund ownership

A daughter cannot unilaterally execute or exercise a Power of Attorney over her parent's assets without the parent's own formal, voluntary execution of that POA.