Do mutual fund scheme mergers put an extra tax burden on investors?

My question is that Axis Mutual Fund merged two of its schemes on September 30, 2021, and allotted items in a brand new entity. How this can be considered from a capital beneficial properties angle. Furthermore, the RTA has proven the transaction as sale and buy and it seems within the annual data assertion revealed by the IT division
– Brij Mohan Lal

We now have witnessed fairly a variety of mutual fund scheme mergers within the final monetary yr. Most of them are on account of a fund home buying one other. Sundaram Mutual Fund accomplished the acquisition of Principal Mutual Fund on December 31, 2021. Baroda AMC merged with BNP Paribas over the past monetary yr to kind Baroda BNP Paribas. In addition to, there have been situations the place two schemes inside the similar fund home have been merged for one or the opposite cause.

Whereas the above mergers have been a interval of tension for a lot of traders deciding what they need to be doing, most of them are once more anxious since it’s time for submitting earnings tax returns for the monetary yr 2021-2022. They need to know in the event that they should pay some taxes due to such mergers?

Effectively, a merger of mutual fund schemes doesn’t induce any tax legal responsibility for an investor. Traders are liable to taxation solely after they make a redemption. So in the event you would have determined to stay with the brand new scheme, your funding should have mechanically transferred to the brand new scheme and there’s no tax legal responsibility. You may be taxed once you redeem your mutual fund. For the aim of calculating capital beneficial properties at the moment, the unique date of buy and value (of the outdated scheme) is taken into account.

This is an instance for higher understanding. Let’s take two funds, A and B. Fund A is getting merged into Fund B. Suppose, you had made an funding value Rs 1.5 lakh in Fund A some six months in the past and its worth has now grown to be Rs 2 lakh. Fund B’s NAV is Rs 160. To rely the variety of items you get in Fund B, you must divide your funding worth with the NAV of Fund B (Rs 2 lakh / Rs 160). So that you get 1,250 items of Fund B.

Suppose after 3 months you determined to redeem these items. And if Fund B’s NAV is Rs 180, the worth of your funding can be Rs 2.25 lakh (Rs 180 x 1,250). Your holding interval for the aim of calculating capital beneficial properties is counted from the unique date of buy in Fund A. So the overall holding interval can be 9 months (six months of pre-merger + three months of post-merger).

Someway, in the event you had made an exit from the funding after attending to know that your scheme is merging into one other, you’ll have to pay capital beneficial properties tax on the realised beneficial properties.