Do you have to pay tax on inherited mutual funds?

If I inherit mutual fund whose original purchase cost is Rs 5 lakh and at the time of transmission to me, its cost is Rs 10 lakh. Now when I sell them say at the rate of Rs 15 lakh, how the tax implications on me, i.e., if for taxation purpose purchasing cost for me is on the date of original purchase or on the date of transmission to me? How LTCG and STCG will be sorted out - Tarun Singla

Mutual funds can be transmitted to a nominee or legal heir after the demise of the unitholder. We have talked about the process of transfer of mutual fund units after a unitholder's death in detail. Once the transmission is done, the usual question would be about the tax implication on those transmitted units.

Luckily, there is no inheritance tax in India. You don't have to pay tax when units are transferred to your name from your parents or anyone else. But, you will be liable to pay taxes when you redeem the units, just like the case with any other mutual fund investment.

While calculating capital gains tax, we need to know the duration of the holding period, whether it is short-term or long-term. While calculating the holding period, we take the original date of purchase and not the transmission date.

For example, suppose A's father had invested Rs 5 lakh in HDFC Sensex Index Fund in 2019. Here, A's father is the unitholder and A is the nominee. Unfortunately, A's father passed away last year and as a nominee, the units of this fund were transferred to A. The value of the mutual fund units at the time of transmission was Rs 7 lakh in 2021. Now, A wished to redeem those units today whose value is Rs 7.80 lakh.

For the purpose of calculating the duration, the period from 2019 to today is considered, which is three years. Likewise, the cost would be Rs 5 lakh. Since this is an equity-oriented fund and the holding period is more than one year, the gains are termed as long-term capital gains. They are taxed at 10 per cent and gains up to Rs 1 lakh are exempt from taxation.

The total gain comes to be Rs 2.80 lakh (subtract Rs 5 lakh from Rs 7.80 lakh) which is beyond the threshold of Rs 1 lakh. So, Rs 1.80 lakh will be considered while calculating the capital gains tax. Assuming A doesn't have any other gains, he will pay Rs 18,000 (Rs 1.80 lakh x 10 per cent) as tax.

Suggested read: What to do when a joint holder in a mutual fund passes away?

This article was originally published on August 23, 2022.