Central Board of Direct Taxes (CBDT) has clarified that no short term capital gain tax would be attracted on roll over of FMPs.
Last year, the budget has extended the tenure of non-equity funds to 36 months to qualify for long term capital gain tax. As a result, many fund houses had rolled over their schemes by extending the tenure of their FMPs from 12-18 months to 36 months in a bid to avail the benefits of long term capital gain tax to the investors. These schemes were rolled over such that they would mature just after three years, giving benefit of indexation to the investors.
In a notification issued to fund houses, CBDT said, “No capital gain will arise at the time of exercise of the option by the investor to continue in the same scheme. The capital gains will, however, arise at the time of redemption of the units or opting out of the scheme, as the case may be.”
Explaining the rationale behind the decision, CBDT said, “In the case of mutual funds, the unit of a mutual fund constitutes a capital asset and any sale, exchange or relinquishment of such unit is a transfer under clause 47 of section 2 of the act. The roll-over in accordance with the aforesaid regulation will not amount to the transfer as the scheme remains the same.”
Earlier, CBDT had received a representation seeking clarification regarding applicability of tax on capital gains in the hands of the unit holders at the time of rollover of FMPs.
SEBI rule allows fund houses to roll over their close ended schemes if they get investors consent. Investors who don’t want to continue with the scheme can redeem their investments at the prevailing NAV. However, AMCs need to maintain 20-25 rule (minimum of Rs.20 crore and 25 investors). Investors have to send a written consent to the fund house if they wish to remain invested in a fund which is getting rolled over.
Last year, the budget has extended the tenure of non-equity funds to 36 months to qualify for long term capital gain tax. As a result, many fund houses had rolled over their schemes by extending the tenure of their FMPs from 12-18 months to 36 months in a bid to avail the benefits of long term capital gain tax to the investors. These schemes were rolled over such that they would mature just after three years, giving benefit of indexation to the investors.
In a notification issued to fund houses, CBDT said, “No capital gain will arise at the time of exercise of the option by the investor to continue in the same scheme. The capital gains will, however, arise at the time of redemption of the units or opting out of the scheme, as the case may be.”
Explaining the rationale behind the decision, CBDT said, “In the case of mutual funds, the unit of a mutual fund constitutes a capital asset and any sale, exchange or relinquishment of such unit is a transfer under clause 47 of section 2 of the act. The roll-over in accordance with the aforesaid regulation will not amount to the transfer as the scheme remains the same.”
Earlier, CBDT had received a representation seeking clarification regarding applicability of tax on capital gains in the hands of the unit holders at the time of rollover of FMPs.
SEBI rule allows fund houses to roll over their close ended schemes if they get investors consent. Investors who don’t want to continue with the scheme can redeem their investments at the prevailing NAV. However, AMCs need to maintain 20-25 rule (minimum of Rs.20 crore and 25 investors). Investors have to send a written consent to the fund house if they wish to remain invested in a fund which is getting rolled over.
