The FM has proposed to provide tax neutrality on transfer of units of mutual fund for scheme mergers.
A long pending demand of the mutual fund industry on tax neutrality on consolidation of schemes has finally been met by the FM in Budget 2015. In future, there will be no tax liability on investors when two schemes are merged.
Back in 2011, AMFI had asked the Ministry of Finance to align tax treatment of merger of mutual fund schemes with that of corporate mergers.
In a corporate merger, there is no tax liability that arises when the surviving company issues new shares to the shareholders of the company that is absorbed. For e.g., if company A is merged with company B and new shares of company B are issued to the shareholders of company A, it is not treated as a sale and purchase. Therefore, there is no capital gains tax liability involved.
In mutual funds, if scheme C is merged with scheme D, then it is treated as redemption by unit-holders of scheme C and issue of units of scheme D to them is considered as purchase of new units. The investors of scheme C are liable for capital gains tax as it is considered as withdrawal.
The investors in the scheme being merged are liable for capital gains tax. There is no long-term capital gains tax on investments in equity schemes if investments are held for more than a year. However, in debt funds, investors have to pay both short-term as well as long-term capital gains tax.
According to SEBI norms, two schemes can be merged if the fundamental attributes of surviving scheme is not tinkered with. Fund houses are allowed to merge schemes keeping investors’ interests in mind. They have to get an approval by the board members and trustees. Fund houses then file a proposal with SEBI seeking such a merger. After getting an approval, AMCs give an exit option to investors.
Typically, fund managers decide which schemes need to be merged. Usually, non-performing schemes or those which have a small AUM are merged with bigger funds. The shares held by the scheme which is getting merged are transferred to the surviving scheme. This results in increase in the number of units, AUM and the investor base of the surviving scheme.
After June 2013, the industry has seen many scheme mergers due to reduction in securities transaction tax (STT) from 0.25% to 0.001%. The proposal to do away with taxation on consolidation of schemes will further boost such mergers.
“Though the industry has already witnessed too many scheme mergers after a reduction in STT, I think more schemes need to be merged. Currently, there are 1861 schemes in the mutual fund industry and I don’t think so many funds are required. Such mergers will gain momentum in the coming months,” said Ajit Menon, EVP, Head – Sales & Co-head - Marketing, DSP BlackRock Investment Managers.
A senior official from a foreign fund house said that SEBI is nudging fund houses to consolidate schemes. “Currently, industry has too many schemes. In fact, a few fund houses have three schemes each in the liquid funds and mid & small cap category. This creates confusion even among distributors.”
