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What is considered as the date and cost of acquisition of segregated portfolios for the tax purpose?

Ashutosh Gupta explains how the date and cost of acquisition of a segregated portfolio are calculated for tax purpose

What is considered as the date and cost of acquisition of segregated portfolios for the tax purpose?
- Ajit Gupta

The clarity on the tax treatment of segregated portfolios emerged in the finance bill for FY21 and these rules were made applicable from April 1, 2020.

Talking about the tenure of holding, your date of acquisition even for a segregated portfolio would be considered as your original date of investment in a fund. Let's say you invested in a bond fund about five years back and about one year back, there was a credit incident because of which the fund had to segregate a certain portion of the portfolio into a segregated portfolio. Now one year down the line, let's say the fund has been able to recover that amount which it had to segregate and pay it back to you. So, your tenure of holding for even the segregated portfolio would be considered this entire five-year duration since the time when you made the original investment in the fund. Therefore, the beneficial long-term capital gains tax treatment, which gets you the indexation benefit, would be applicable to this segregated portfolio.

Now I am coming to the calculation of the cost of acquisition. Your original cost of acquisition of the units of this fund would be split between the main portfolio and the segregated portfolio in the ratio of the NAVs of the main portfolio and the segregated portfolio on the date of segregation. Let me explain that with an example. Let's say you have a fund whose prevailing NAV is Rs 95, out of which Rs 5 in this NAV is contributed by certain bonds which are distressed right now and the fund company decides to segregate these distressed bonds into a segregated portfolio. So you will end up with two portfolios - the main portfolio whose NAV would be Rs 90 and a segregated portfolio whose NAV would be Rs 5. Thus, the ratio of your main portfolio to the segregated portfolio on the date of segregation is 90:5 and in course of time, when you are to redeem these units, your original cost of acquisition of these units will be bifurcated in this 90:5 ratio to calculate the cost of acquisition of the main portfolio and the segregated portfolio. Accordingly, the tax liability will be calculated.

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