The holding period of inherited mutual funds determines whether they are taxed at long-term or short-term capital gains rates
03-Mar-2023 •Ravi Banagere
After the death of investor, mutual fund got transferred to the nominee. What will be tax liability if he redeems (i) immediately after the death of investor, (ii) if he redeems after some years? - Vishwa Prakash
After the death of a mutual fund unitholder, the mutual fund units are transferred to a nominee or legal heir (second holder if jointly-held). This process is called transmission, and it is not subject to any tax.
However, once the units are transferred, the new owner may be liable to pay capital gains tax if they choose to redeem the units, regardless of whether the redemption takes place immediately after the death of the unitholder or several years later.
Tax treatment of mutual fund investments: Calculating capital gains
The tax treatment of mutual fund investments differs depending on whether they are classified as long-term or short-term capital assets, based on the holding period.
In the case of inheritance, the holding period is calculated from the original date of purchase, and not the date of transmission.
An example for better understanding
If Amit's father purchased Rs 5 lakh worth of units in an equity-oriented mutual fund in 2020, and Amit received the units as a nominee after his father's death in 2021, the holding period would be calculated from 2020.
If Amit decides to redeem the units in 2023 for their current value of Rs 7.50 lakh, the gains would be classified as long-term capital gains, as the holding period exceeds one year. After deducting the original purchase price of Rs 5 lakh, the gain would be Rs 2.50 lakh (Rs 7.50 lakh - Rs 5 lakh), of which Rs 1.50 lakh would be taxable (exemption of Rs 1 lakh). Therefore, Amit would need to pay Rs 15,000 (Rs 1.50 lakh x 10 per cent) as capital gains tax.
Suggested read: How can you transfer assets from nominee to legal heir?