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Tax Implications on Fund Mergers

Funds mergers are considered as redemption of investments from one fund and a new purchase in another

I had made investments in Morgan Stanley Mutual Fund in September 2013, in the Liquid Fund (growth and dividend reinvestment options). The fund was merged with HDFC Liquid Fund on 27 June 2014. On the merger date, there was a gain of ₹25000 in Growth and ₹4500 in the dividend reinvestment option. I did not exit and my investments are continuing with HDFC. I understand that investment date with HDFC will be considered from the merger date. How am I to treat the amounts of ₹25000 and ₹4500 for tax purposes? Joginder Sud

As your investment holding period is less than a year, you will be liable to pay short term capital gains tax on the gain of ₹25,000 in the growth option and ₹4,500 in dividend reinvestment option of the Morgan Stanley Liquid Fund.

Funds mergers are considered as redemption of investments from one fund and a new purchase in another. The basic transaction in a merger is akin to selling the units of one fund and buying the units of another. Securities transaction tax is usually charged on such purchase and sale of units, but in the case of fund mergers it is borne by the fund house.

However, debt funds investments held for less than three years are now subject to short term capital gains tax at your slab rates. Long term capital gains tax of 20 per cent with indexation, is levied if the investment is held for more than three years. In your case, as your Morgan Stanley investment was less than three years old, the short term capital gains will be added to your income and taxed according to your slab.

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