No tax on redeemed, bonus mutual fund units

MUMBAI: Putting to rest a long-standing dispute between income tax officials and mutual fund houses, the Central Board of Direct Taxes (CBDT) has clarified that redemptions, repurchase of fund units and also issue of bonus units will not be taxed. This comes as a big relief for investors as well as mutual fund houses.

A few years ago, the I-T department had asked several fund houses for additional income tax for several years on such units which the fund houses had claimed were not income but capital gains in the hands of the unit holders.

Through a clarification on Tuesday, CBDT said that redemptions or repurchase of MF units would not attract any income tax under sub-section 2 of section 115R since "such income is not of the nature of income 'distributed' to the unit holders and hence lies outside the purview of this section".

The CBDT clarification also said that "bonus units at the time of the issue would not be subjected to additional income tax under section 115R...since issue of bonus units is not akin to distribution of income by way of dividend".

Tax practitioners said that the CBDT clarification has come as a huge relief to fund houses and would avoid litigations and related costs and time for them. "The CBDT circular helps allay concerns of mutual fund unit holders who were unnecessarily being taxed by the tax authorities at the assessment level. Technically, redemption/sales of units should not be treated as 'distributed income' by the mutual funds as it is the income of the unit holders and not of the mutual fund per se," Amit Maheshwari, partner, Ashok Maheshwary & Associates, said.

Industry players pointed out that most fund houses were affected by the I-T department move since some officials from the department did not agree with the view of fund houses that such a tax would amount to double taxation. "There have been several representations from the mutual funds to some of the top income tax officials on this issue. This clarification now avoids lot of unnecessary litigations," Gautam Mehra, ED, PricewaterhouseCoopers, said.

Mehra and Maheshwari were two industry experts who handled this issue on behalf of some fund houses.