The Budget 2016 has proposed that AMCs can also merge multiple plans under one scheme. Such merger of plans within a scheme will be exempted from capital gains tax.
The Budget 2015 had provided tax neutrality on transfer of units of mutual fund for scheme mergers only. Thus, many AMCs were awaiting clarity on whether merging multiple plans within a scheme would also attract capital gains tax.
“The Budget 2015 exempted investors from paying capital gains tax during scheme merger. However, there was no clarification whether it applied to different plans within a scheme. Now, there will be more consolidation of multiple plans within a scheme in the industry,” said the product head of a bank sponsored fund house.
“We were waiting for this clarification which is why you see multiple plans within a scheme, said the product head of a private sector fund house.
Fund houses say that they might merge institutional plans with direct plans and retail plans with regular plans post the budget clarification.
It may be recalled that in 2012, SEBI had asked fund houses to do away with multiple plans within a scheme. “AMCs shall launch schemes under a single plan and ensure that all new investors are subject to single expense structure,” stated a SEBI circular issued in 2012.
The regulator had asked AMCs to accept fresh subscriptions in existing schemes with multiple plans based on the amount of investment (i.e. retail, institutional, super-institutional, etc.) only under one plan. Other plans were supposed to be continued till the existing investors remain invested in the plan.
Fund houses charge a lower expense ratio under institutional plans and a slightly higher TER under regular plans, since regular plans need to be sold through distributors by paying commissions which entails higher costs. The minimum investment amounts of institutional and regular plans differ. Typically, institutional plans accept Rs. 1 lakh as initial investment which can go up to Rs. 5 crore depending on the scheme.
After the budget clarification on capital gains tax, many AMCs are expected to merge multiple plans within a scheme. “We had to wait for all investors to redeem before merging two plans since they would have to pay capital gains tax. Now that there will be no capital gains tax, we can go ahead and merge these plans,” said the above quoted official.
