MF investors can now plan ahead for their debt investments

Arnav PandyaThe Central Board of Direct Taxes (CBDT) has provided a big element of relief for mutual fund investors by clarifying that a rollover of a mutual fund scheme by a fund house would not be considered as a sale by the investor. It is only when they have actually transferred the units or exercised an option to opt out of the fund that the question of the capital gains or loss will arise. This is a very significant announcement and will help the investor to ensure that they are able to plan effectively for the situation that has arisen after the change in the manner in which capital gain is calculated for debt oriented funds.Change in lawThe law related to debt oriented funds was changed earlier wherein the time period for which they had to be held to be classified as a long term asset was increased from a period of 12 months to 36 months. This meant that any sale of the units before this time period would result in the gains being classified as a short term capital gains and this would be added to the income of the individual resulting in a higher tax liability for them. Investors then started looking for routes whereby they could reduce the burden that they faced on account of the change in the norms and one of these was with respect to fixed maturity plans that were coming to an end after being in existence for 12-13 months.  Impact on specific fundsThe biggest impact of the change was witnessed on the fixed maturity plans that were in existence for a period of 12-13 months because they were meant to ensure that the gains here would be classified as long term capital gains. The change in the definition put paid to that hopes but what was significant was that a lot of the existing funds found themselves in a position where the income or gains that arose from them would be classified as a short term capital gain. This would happen as the details about the change said that any fund that was sold after the date that the change would come into effect would have to make the calculation according to the new rules. The time when these were issued had no dealing with the entire exercise and hence many funds found themselves stuck in this position with the end result that investors would end up paying larger amount of capital gains.ChangesOne of the changes that a lot of fund houses proposed was to roll over the funds that they had in existence to a period that was more than 36 months. There were however doubts raised regarding the impact of the rollover because on the overall basis it looked as if the investor would be holding the investment for a period of 36 months but if the tax authorities calculated that the rollover was a sale then there could be a double hit because the short term gains could arise twice if the investor participated in the roll over. There was a clarification that was sought on the issue as a lot of funds have undertaken this kind of exercise and there are a large number of investors who are grappling with the same problem. The clarification that the rollover is not a sale is a boost to the investors who can ensure that they are able to plan effectively as the capital gains for them would arise only when they actually sell the units. This is beneficial because it is upto the investor to make the decision as to when they would sell the units and book the gains. This will end up reducing the tax burden for a lot of investors and those who find themselves in this position should ensure that they make use of the benefit.