Tax neutrality on merger of similar schemes of Mutual Funds

[Admin TMI]

Question - What are the proposed in Finance Bill 2015 to facilitate consolidation of schemes of mutual funds ?

[Admin TMI]

Tax neutrality on merger of similar schemes of Mutual Funds

Securities and Exchange Board of India has been encouraging mutual funds to consolidate different schemes having similar features so as to have simple and fewer numbers of schemes. However, such mergers/consolidations are treated as transfer and capital gains are imposed on unitholders under the Income-tax Act.

In order to facilitate consolidation of such schemes of mutual funds in the interest of the investors, it is proposed to provide tax neutrality to unit holders upon consolidation or merger of mutual fund schemes provided that the consolidation is of two or more schemes of an equity oriented fund or two or more schemes of a fund other than equity oriented fund. It is further proposed that the cost of acquisition of the units of consolidated scheme shall be the cost of units in the consolidating scheme and period of holding of the units of the consolidated scheme shall include the period for which the units in consolidating schemes were held by the assessee. It is also proposed to define consolidating scheme as the scheme of a mutual fund which merges under the process of consolidation of the schemes of mutual fund in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 and consolidated scheme as the scheme with which the consolidating scheme merges or which is formed as a result of such merger.

These amendments will take effect from 1st April, 2016 and will accordingly apply, in relation to the assessment year 2016-17 and subsequent assessment years.

AI Summary

Tax neutrality for mutual fund scheme mergers preserves cost basis and holding period for capital gains computation post-consolidation. Tax neutrality is proposed for consolidation of similar mutual fund schemes where consolidation involves all equity oriented schemes or all non-equity schemes; the cost of acquisition of consolidated units will be the cost of units in the consolidating schemes and the holding period of consolidated units will include the holding periods of consolidating units, preserving continuity for capital gains computation. The proposal defines consolidating and consolidated schemes in relation to the regulatory merger process and is to take effect from 1st April, 2016.