Taxation on merger of MF schemes

Post scheme rationalization, we have been receiving lot of queries regarding taxation on merger of schemes. Please refer below relevant paragraphs from Income Tax Act, 1961.

As per Income Tax Act, 1961, any profit or gain that arises from the transfer of a 'capital asset' is a capital gain.

Finance Act, 2016 amended section 47 of the Act so as to provide tax neutrality to the transfer of units in a consolidating plan of mutual fund scheme made in consideration of the allotment of units in the consolidated plan of that mutual fund scheme. Provided that the consolidation is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund.  

It also amended section 2(42A) and section 49 to provide that cost of acquisition of the units in the consolidated plan of mutual fund scheme referred to in section 47(xix) shall be the cost of units in consolidating plan of mutual fund scheme and period of holding of the units of consolidated plan of mutual fund scheme shall include the period for which the units in consolidating plan of mutual fund scheme were held by the assessee. 

Thus reading the definition of capital gains with amendment made in Finance Act, 2016, for example, merger of HDFC Prudence Fund with HDFC Balanced Advantage Fund is NOT considered as transfer and no capital gains shall arise on the same. Further, cost and date of original investment will be considered for LTCG/STCG.

The same applies for all other merger of schemes.

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