Inherited mutual fund units — cost basis and tax treatment

Inheriting mutual fund units in India is one of the few transfers that is fully tax-exempt at the point of transmission. The heir steps into the shoes of the original investor — inheriting the cost basis, acquisition date, and the eventual capital gains liability that arises only when the units are sold. The process is technically simple but procedurally slow if documentation is not in order.

No tax on the transfer itself

Section 56(2)(x) of the Income Tax Act, which taxes gifts above ₹50,000 received from non-relatives, specifically exempts transfers received through inheritance under a will or intestate succession. The same applies to receipts from "relatives" as defined — which includes the lineal ascendants and descendants of the deceased. The market value of the units on the date of inheritance is not income to the heir.

This is the key distinction from gifting: a gift is a present transfer and may or may not be taxable depending on relationship; inheritance is always tax-free.

Cost basis carries over

When the heir eventually redeems the inherited units, capital gains are computed using:

• Cost of acquisition: the price at which the original deceased investor bought the units, including any grandfathering benefit applicable to equity units bought before 1 February 2018.
• Acquisition date: the original purchase date. The holding-period clock did not reset on transmission.

This is favourable to the heir compared to gifting: gift-acquired units also inherit the donor's cost and date, but inheritance carries no upper limit and no donor-relationship requirement.

What this means in practice

Suppose a parent bought equity mutual fund units in 2014 for ₹10 lakh. They are now worth ₹40 lakh and the parent passes away. The heir inherits the units. There is no tax at the inheritance moment. Two years later the heir redeems for ₹50 lakh. Capital gains computation:

• Cost: ₹10 lakh (the original 2014 purchase price; or the higher of 2014 cost and 31-Jan-2018 NAV if that benefit applies).
• Sale: ₹50 lakh.
• Gain: ₹40 lakh.
• Treatment: LTCG (the parent's 2014 acquisition gives the units 10+ year history).
• Tax: ₹40 lakh − ₹1.25 lakh exemption = ₹38.75 lakh × 12.5% = ₹4.84 lakh plus cess and any surcharge.

Documentation the AMC will need

To transmit units from a deceased holder to the heir, the AMC requires:

• Death certificate (notarised copy).
• Transmission request form (signed by all heirs or the executor).
• Identity and address proof of all heirs.
• Bank account details for the heir's folio.
• One of the following, depending on whether nomination was in place:
  • If nomination registered: nominee's KYC and a transmission form.
  • If nomination not registered and value is below the AMC's threshold (typically ₹2 lakh): heir affidavit, no-objection certificates from other legal heirs, indemnity bond.
  • If nomination not registered and above threshold: succession certificate, probate of will, or letters of administration.

The AMC may also request the original investor's PAN card and folio statement to verify holdings.

The case for nomination

Without a registered nominee, the transmission paperwork can take 3-12 months depending on the value and the family's documentation. SEBI requires every new mutual fund folio to either register a nomination or explicitly opt out. The cost of registering a nominee is zero; the cost of not registering one is, for families, often months of bureaucratic delay during a difficult time.

Nominees are not the same as legal heirs. The nominee receives the units in trust; the legal heir owns them per the will or succession law. Most cases the two are the same person, but the distinction matters if a will names a different beneficiary.

Cost basis records to preserve

If you are the likely heir, ensure your parent's CAS statements are downloaded and preserved for every financial year of investment, especially around any purchases pre-2018 (relevant for grandfathering). The income-tax portal's AIS preserves recent data but goes back only a limited number of years. AMC investor portals retain historical CAS but can be hard to access after the original investor's account is dormant.

NRI heir scenarios

An NRI heir can receive Indian mutual fund units. They will face standard NRI taxation on future redemptions — TDS under Section 195, DTAA-based relief where applicable. The transmission itself is still tax-free under Section 56(2)(x).