Your clients will now have to pay less tax than before in segregated portfolios under side pocketing norms in mutual funds, thanks to proposals in the Union Budget 2020.
Currently, if fund house incorporates side pocketing in a scheme, the date of creation of main portfolio and segregated portfolio changes to the existing date as against the original date of investment.
For instance, let us assume your client invested in a scheme on January 1, 2016. The fund house finds out that the scheme has exposure to companies that were downgraded by rating agencies. Now, the fund house decides to side pocket the bad debt on January 1, 2019.
If there is recovery in the bad debt and the investor is able to redeem the segregated units on January 1, 2020, he will have to pay STCG (which is higher than LTCG) even after bring in the scheme for more than three years (i.e. from January 1, 2016 to January 1, 2020). In effect, this is in contradiction with the existing rules in which debt fund investors are allowed to claim LTCG after three years.
Also, the tax laws consider original cost of acquisition to calculate tax liabilities instead of using proportionate cost. For instance, if original cost of acquisition of units is Rs.10 and after segregation, the cost of units in main portfolio comes down to Rs.8 and Rs.2 in segregate portfolio, investors will have to consider Rs.10 as acquisition cost and not Rs.8. As a result, they end up paying more tax.
However, the Budget 2020 has proposed to fix these norms. Investors will now be able to use original date of acquisition and proportionate cost to pay taxes.
This was among AMFI’s Budget 2020-21 proposals.
These amendments will take effect from April 1, 2020, subject to Parliament approval.
