Reader's corner: Is LTCG on amalgamation of MF schemes exempt from tax?

Often, mutual funds close one scheme and amalgamate it with another scheme without paying STT. However, the investor makes LTCG. Is such LTCG exempt from tax? Does the investor have to show the gain in exempt income column in his tax returns?  What will be the cost in case of actual redemption - original or switched? 

Generally, as an investor, you make a choice to transfer your funds from one scheme of mutual fund to another and the resultant gain, if any, is liable for taxation as capital gain. However, pursuant to guidelines issued by the Securities Exchange Board of India (Sebi) for re-categorisation of mutual funds, fund houses may close one scheme and amalgamate or switch over to another scheme without your instruction. This transaction is not categorised as a 'transfer' under the Income Tax Act, 1961 by virtue of Section 47 of the Act. Hence, no incidence of capital gain and/or tax arises on such amalgamation or switch over. Accordingly, you are not required to report this under schedule 'exempt income' of the return form. 

However, when you liquidate, the resultant gain may be either short term capital gains (STCG) or long-term capital gains (LTCG), depending upon the holding period of the units. The original acquisition or investment date will be considered as the date of acquisition of the units for deciding the holding period. Hence, for equity-oriented mutual funds, if the holding period is more than 12 months, the resultant gain will be LTCG taxable at 10 per cent (if gain exceeds Rs 100,000). If the holding period is less than 12 months, it will be STCG taxable at the rate of 15 per cent (plus surcharge and cess, if applicable). 

For debt-oriented funds, the gain will be long term if the period of holding is over 36 months. Such gain will attract a concessional tax rate of 20 per cent with indexation benefit. On the other hand, if the holding period is less than 36 months, the gain will be subject to tax at the applicable slab rate.  

Currently, long-term capital gains over Rs 1 lakh on sale of equity shares (including mutual fund redemptions) are taxable at 10 per cent, provided security transaction tax (STT) has been paid both on sale and purchase of equity shares. Kindly guide me on the long-term capital gain position in the following cases: One, sale of shares purchased before (STT) was introduced in 2004; and two, sale of rights and bonus shares on which no STT was paid at the time of acquiring the shares.

The Finance Act, 2018 withdrew the exemption provided under Section 10(38) of the Income Tax Act, 1961 and inserted Section 112A to tax long-term capital gains arising from the transfer of listed equity shares in a company, or a unit of an equity-oriented fund or business trust at 10 per cent upon fulfilment of certain conditions. Such long-term capital gains should arise from the transfer of the following: equity shares in a company (STT paid on acquisition and transfer); unit of an equity-oriented mutual fund (STT paid on transfer); and unit of a business trust (STT paid on transfer). 

However, in some acquisitions of equity shares, STT could not have been paid at the time of acquisition. To extend the scope of Section 112A to such genuine cases, the central government notified on October 1, 2018 that the chargeability of STT will not be a condition for equity shares acquired before October 1, 2004. Further, the notification also provided that acquisition of equity shares issued by an existing listed company under public issue, right issue, bonus issue, etc. on which STT is not payable on acquisition will be covered under Section 112A. Hence, in your case, both the acquisitions mentioned above will get covered under Section 112A. Even though STT was not paid, you can take the benefit of concessional tax treatment.
 

The writer is partner and leader, personal tax, PwC India. The views expressed are the expert’s own. Send your queries to yourmoney@bsmail.in