Budget 2015: No capital gains tax on merged mutual funds

Mutual fund (MF) investors have something to cheer from the budget. Scheme mergers will no longer be considered as fresh investments, allowing investors to make exits earlier without incurring taxes. For instance, long-term MF investors were deemed fresh investors the moment a scheme was merged with another one.

As a result, these investors ended up paying short-term capital gains (STCG) of 15% on equity products if they sold their units within a year of the scheme merger. The STCG is 20% on fixed income products if the investor exits the scheme before three years.

This anomaly is now being rectified as the budget has offered tax neutrality for scheme mergers. "There will be no tax impact at the time of merger. Scheme mergers will no longer be treated as sale of fund at the time of merger," says Vidya Bala, head, MF research, FundsIndia.com, an online platform for MFs. "The relevant date (for taxation) is the date of original purchase and not the merger date," she says. "MFs can undertake consolidation of schemes," says A Balasubramanian, CEO, Birla Sun Life MF.

The budget has, however, brought MF agents under the service tax net and has proposed a marginal increase in dividend distribution tax for debt funds. These moves would increase transaction costs for investors. "Exemptions are being withdrawn on services provided by a mutual fund agent to a mutual fund or assets management company, (and) distributor to a mutual fund or AMC," the budget memorandum said.

This means that fund houses would deduct a service tax of 14% on commissions paid to distributors in the forthcoming financial year. The move comes at a time when market regulator Sebi is looking to cap upfront commissions paid to distributors. The finance ministry had exempted MF distributors from service tax, which stood at 12.36% in 2012.