Mutual fund scheme mergers won’t put extra tax burden on investors
A recent budgetary announcement (in 2017) clarified that scheme mergers will not place any additional burden on the investor in terms of taxation
How will long-term capital gains (LTCG) tax be calculated on equity schemes that have been recategorised as per Sebi’s new norms. I have SIPs in IDFC Premier Equity Growth Scheme (direct) and Reliance Regular Saving Equity Growth Fund (direct), which have been recategorised as IDFC Multi Cap Fund and Reliance Value fund, respectively. What will be the net asset value (NAV) considered for the sale?
Regarding the first question that you have raised, although there have been quite a few scheme mergers recently consequent to the Sebi circular on categorisation, such mergers have happened before and this is not a new issue. A recent budgetary announcement (in 2017) clarified that scheme mergers will not place any additional burden on the investor in terms of taxation. That is, the merger event in itself will not be considered a taxable event or a tax-consequential event. So, in case a scheme that you hold has been merged with another, the holding tenure of your investment will be from the original investment date and the gain (or the loss) will be calculated by reducing the investment cost from the redemption cost. In case you make a partial redemption and need to make an average cost calculation, the ratio using which units of the new scheme were given to you in exchange for the units of the old scheme will come into play. For example, if you hold scheme A which got absorbed into scheme B by offering 0.6 units in scheme B for every unit of scheme A, the same pro-rating will apply for the cost calculation for the units redeemed as well.
To answer your second question, the two recategorisations are not material from a tax perspective. Both the schemes are equity-oriented schemes, and despite the renaming and the reclassification, the tax treatment of your holdings will remain the same. So, if you had invested in one of these funds and redeem it after a year, you would likely have accrued a certain amount of gains. Of this, any gains you would have accrued until 31 January 2018 would be exempt from LTCG tax, thanks to a grand-fathering clause specified in the budget this year. Gains accrued after this date will be exempt up to ₹1 lakh, and the remaining amount will be taxed at 10%.
Is it possible to pause SIPs for a few months? Will I have to pay for this facility, and is this available with all mutual funds?
Occasionally, investors need to skip a payment or two from the SIP schedule to accommodate personal exigencies. Some mutual fund companies recognise this and offer the facility to “pause” an SIP. Franklin Templeton, ICICI Prudential and Reliance Mutual Fund are some of the fund houses that offer this facility. It does not cost anything to use this feature, but different fund houses have different restrictions on how to use pause. In some cases, it can be exercised only once per SIP tenure and in other cases, a pause cannot be for more than a single month. Please check with your fund house about the restrictions. If you are investing through an online platform, they may offer such a facility as well, and if they do, it will be available across all the fund houses they support on their platform.
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Srikanth Meenakshi is co-founder and chief operating officer, FundsIndia.com. Queries and views at email@example.com
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