Clarification on schemes' merger in Budget relieves mutual fund investors

Industry executives say it will further boost consolidation of schemes

In a relief to the mutual fund investors when it comes to merger of schemes, the government has proposed in Union budget to take into consideration the holding period of the units held in the erstwhile schemes for taxation purposes. Further, the cost of acquisition of the units in the consolidated plan will be the cost of units in the merged plan. The amendments will come into effect from April 1, 2017 and will be applicable in the assessment year 2017-18.

Given the stricter norms by the capital market regulator forcing mutual fund houses to merge their various schemes, the government in 2016 had provided tax neutrality to the transfer of units in a consolidating plan of mutual fund schemes. However, regarding the holding period there remained a grey area.

In the proposed finance bill 2017, government addressed this grey area and said, "It is proposed to amend 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."

Last year, the mutual fund industry had requested for the clarification on the matter.

A Balasubramanian, chief executive officer (CEO) of Birla Sun Life Mutual Fund, told Business Standard, "It is effectively to clarify that consolidation of schemes taking into account the holding period of consolidating schemes and it is a clarification to the earlier section ...It is a good move and there is no grey area (left)."

Sector experts say that proposed clarifications will further boost the consolidation of mutual fund schemes. 

According to Sundeep Sikka, CEO of Reliance Nippon Mutual Fund, "This is a clarificatory amendment to last year proposal wherein consolidation of plan (merger of plan within the same scheme) was exempted from capital gains. However the provision failed to recognise the original period of holding and the cost of the acquisition. With the current provision exemption of holding period as original cost of acquisition is extended to consolidated scheme whereby making it tax neutral to the investor and will now pave the way for MF to consolidate various plans like daily dividend, monthly dividend, among others."

Currently, there are over 2,200 mutual fund schemes across the categories being offered to investors by the fund industry.