No tax when MF plans merge

Investors were stuck in old schemes though they were suspended because of tax implications

The Budget has made mutual fund investors’ life easier. It says there will be no tax when mutual fund houses merge or consolidate different plans within a scheme. This means, when your fund house decides to merge institutional plan with retail or when it merges dividend distribution plan with growth option, you won’t need to pay capital gains tax on such moves.

The Securities and Exchange Board of India (Sebi) has been pushing mutual funds to consolidate funds that have similar themes and also merge retail and institutional plans that had different expense ratios. Last year, the government had rationalised capital gains tax provisions when different funds were merged. This year, it has removed capital gains tax for consolidation of different plans within the same scheme.

Hemant Rustagi, chief executive officer of Wiseinvest Advisors, says that in the past, mutual funds usually launch two different plans within the same scheme depending on the amount a person is investing. Hence, there were two plans – one for institutional investors and high net worth individuals (HNIs) and another for retail. And, the total expense ratios of both the schemes were different, leading to different net asset values (NAVs). “The scheme that has institutions and HNI had lower expense ratio and retail plan had higher. The difference could be around one per cent.”

According to Tata Asset Management spokesperson, after September 2012, many of the plans within a scheme were suspended for subscription as mandated by a Sebi circular. The schemes, however, could not be closed or merged with other remaining non-suspended plans due to capital gains tax issues. After this decision to exempt the investor from capital gains tax on account of merger of plans within a scheme, it will lead to consolidation of all plans into direct and non direct plans as mandated by Sebi.

Vikram Bohra, partner – financial services tax and regulatory services - at PwC India, says this would also help mutual funds that want to merge dividend reinvestment plans with growth plans. “Both are the same, in essence. However, when funds declares dividend and reinvests it, they need to pay dividend distribution tax (DDT). In growth plan, however, there is no DDT.”

Different plans within the same scheme have different NAVs. According to tax regulations, when a person moves from one plan to the other, it’s considered redemption because new units are allotted to the investor. From the next financial year onwards, this anomaly will be rationalised. According to Aashish Somaiyaa, CEO of Motilal Oswal Asset Management Company, this will also help individuals who invested in bonus plans. Mutual fund association, Amfi, has asked all fund houses to avoid bonus stripping plans. “Investors in this plan can be merged with growth plans now.”