Feb 06, 2017 01:40 PM IST | Source:

Budget 2017: Mutual funds cheer better clarity on scheme mergers

The government has proposed in the budget to take into consideration the holding period of the units held in the erstwhile schemes for taxation purposes

Himadri Buch
Mutual fund investors have something to cheer from the budget.The FM today in his Budget speech proposed to take into consideration the holding period of the units held in erstwhile schemes for taxation purposes.
It clarified many of the concerns mutual fund investors had over whether they will be levied a tax on transfer of units between schemes/plans.

The amendments will come into effect from April 1, 2017 and will be applicable in the assessment year 2017-18.

This means scheme mergers will no longer be considered as fresh investments, allowing investors to make exits earlier without incurring taxes. For instance, long-term MF investors were deemed fresh investors the moment a scheme was merged with another one.

As a result, these investors ended up paying short-term capital gains (STCG) of 15% on equity products if they sold their units within a year of the scheme merger. The STCG is 20% on fixed income products if the investor exits the scheme before three years.


This anomaly is now being addressed as the budget has offered tax neutrality for scheme mergers. "There will be no tax impact at the time of merger. Scheme mergers will no longer be treated as sale of fund at the time of merger," said a mutual fund manager. "The relevant date (for taxation) is the date of original purchase and not the merger date," he said. MFs can undertake consolidation of schemes," he added.

Mutual fund officials said that this was a clarification/amendments to the last year's proposal where the merger of a plan within the same scheme was exempted from capital gains.

But the provision did not mention the cost of acquisition and the original holding period.

"We are happy FM has clarified on the tax part for scheme mergers. The investors had to pay tax as it was treated as a redemption. So, earlier if two schemes of different fund houses merged, there was no tax," Jimmy Patel, Chief Executive Officer, Quantum Mutual Fund.

"But now, the FM has clarified that even if you merge two plans of the same fund house, no tax will be levied," Patel added.

The capital market regulator had always encourged merger of schemes as too many of them sparked confusion. The government in last year's Budget had made it clear that there will be no tax on the transfer of units in a consolidating plan of MF schemes, but the the holding period on the scheme was not clarified.

This move is expected to boost the consolidation of schemes/plans.
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