Let's understand the taxation of merged mutual fund schemes
My query is that Axis Mutual Fund merged two of its schemes on September 30, 2021, and allotted units in a new entity. How this will be viewed from a capital gains angle. Moreover, the RTA has shown the transaction as sale and purchase and it appears in the annual information statement published by the IT department
- Brij Mohan Lal
We have witnessed quite a number of mutual fund scheme mergers in the last financial year. Most of them are due to a fund house acquiring another. Sundaram Mutual Fund completed the acquisition of Principal Mutual Fund on December 31, 2021. Baroda AMC merged with BNP Paribas during the last financial year to form Baroda BNP Paribas. Besides, there have been instances where two schemes within the same fund house have been merged for one or the other reason.
While the above mergers have been a period of anxiety for many investors deciding what they should be doing, most of them are again anxious since it is time for filing income tax returns for the financial year 2021-2022. They want to know if they will have to pay some taxes because of such mergers?
Well, a merger of mutual fund schemes does not induce any tax liability for an investor. Investors are liable to taxation only when they make a redemption. So if you would have decided to stick with the new scheme, your investment must have automatically transferred to the new scheme and there is no tax liability. You will be taxed when you redeem your mutual fund. For the purpose of calculating capital gains at that time, the original date of purchase and cost (of the old scheme) is considered.
Here's an example for better understanding. Let's take two funds, A and B. Fund A is getting merged into Fund B. Suppose, you had made an investment worth Rs 1.5 lakh in Fund A some six months ago and its value has now grown to be Rs 2 lakh. Fund B's NAV is Rs 160. To count the number of units you get in Fund B, you need to divide your investment value with the NAV of Fund B (Rs 2 lakh / Rs 160). So you get 1,250 units of Fund B.
Suppose after 3 months you decided to redeem these units. And if Fund B's NAV is Rs 180, the value of your investment would be Rs 2.25 lakh (Rs 180 x 1,250). Your holding period for the purpose of calculating capital gains is counted from the original date of purchase in Fund A. So the total holding period would be nine months (six months of pre-merger + three months of post-merger).
Somehow, if you had made an exit from the investment after getting to know that your scheme is merging into another, you will have to pay capital gains tax on the realised gains.