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

Finance Bill 2015 proposes tax-neutral mergers for mutual funds, impacting capital gains from April 2016 onward. The discussion addresses the tax implications of merging similar mutual fund schemes, as proposed in the Finance Bill 2015. The Securities and Exchange Board of India encourages consolidating mutual fund schemes to simplify offerings. Previously, such mergers were considered transfers, incurring capital gains tax for unitholders. The proposal aims to provide tax neutrality for these consolidations, applicable to equity-oriented and non-equity-oriented funds. It specifies that the acquisition cost and holding period of the new units will include those from the original schemes. These changes take effect from April 1, 2016, impacting the assessment year 2016-17 onwards.