Debt MF LTCG: Changes made in Budget 2014-15

Units of Debt  Mutual Fund (MF) transferred and Unlisted securities between 1- 4 - 2014 and 10 - 7 - 2014 shall be deemed to be long-term capital assets, if held for more than 12 months:

It is proposed that unlisted shares and units of a MF (other than Equity oriented mutual fund) shall be categorized as long-term capital assets only if they are held for more than 36 months. The existing provision requires holding them for a period of more than 12 months so as to categorize them as long-term capital assets.

So, only a security listed on stock exchange as well as units of equity oriented fund held by an assessee for more than twelve months shall be considered as 'long-term capital assets'.

The Finance Bill, 2014 -15 as passed by the Lok Sabha has inserted a new proviso in section 2 (42A) to provide that the unlisted shares and units of a MF shall continue to be deemed to be long-term capital assets if they have been transferred during the period from April 1, 2014 to July 10, 2014 after holding them for a period of more than 12 months (instead of more than 36 months). This proviso shall be inserted w.e.f. April 1, 2015.

LTCGs (Long-term Capital Gains) on Mutual Fund Units transferred between 1-4-2014 and 10-7-2014 shall be taxable at 10% without indexation..

LTCGs on mutual funds (other than equity oriented mutual funds) are proposed to be taxed at the rate of 20 %. Accordingly, option to pay tax at the rate of 10 % (without indexation) would not be available in case of long-term capital gain arising from sale of such units.

However, the Finance Bill, 2014 as passed by the Lok Sabha provides that the benefit of the proviso shall continue to be available for the long-term capital assets, being units of Mutual Funds, transferred between April 1, 2014 and July 10, 2014. Thus, the assessee shall have an option to pay tax at lower of following rates if units of Mutual Funds are transferred between the said periods:

(a) At  10% of capital gains as computed after reducing the cost of acquisition without indexation

(b) At  20 % of capital gains as computed after reducing the indexed cost of acquisition

The Finance Bill, 2014 provided that the amendments to section 112 will take effect from Financial Year 2014-15. This raised doubts among investors regarding the retrospective effect of the provision to tax the units of Mutual Funds (other than equity oriented mutual funds) redeemed during period April 1, 2014 to July 10, 2014. Thus, a proviso has been inserted for the transitional period to allow benefits of concessional tax rates during the aforesaid period.

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