Transmission requires spot soon after the death of an investor, exactly where the mutual fund (MF) units held by the deceased unitholder are transferred to the nominee(s) or the legal heir(s). At the time of transmission, no tax is involved.
“Transmission of mutual fund units refers to transmission of units to the nominee and/or the surviving unitholders after the death of the unitholder. It is pertinent to note that the term ‘transfer’ is different from ‘transmission’ and accordingly, transmission of units to the nominee would not attract any capital gains tax as it does not result in any transfer u/s 2(47) of the Income Tax Act, 1961,” mentioned Dr. Suresh Surana, Founder, RSM India.
The recipients of transmitted MF units are, even so, not permitted to redeem or switch or transfer such units inside 15 days from the date of transmission.
Once the transmitted units are redeemed or switched or transferred any time soon after the 15-day cooling period, the get, if any, will turn out to be taxable.
“When the nominee holding such (transmitted) units further transfers such units to any person, the said transaction would be subjected to capital gains tax and for the same,” mentioned Dr. Surana.
But, for the goal of figuring out quick-term and lengthy-term capital gains, which date will be thought of as the date of initial investment – the date of original investment or the date of transmission?
“The period of holding would be computed from the original date of investment as well as the cost of acquisition of the original unitholder would be deemed as the acquisition cost for computing the capital gains in accordance with Section 49(1)(iii)(a) of the IT Act,” mentioned Dr. Surana.
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“The difference between the purchase price of a mutual fund unit and the value at which it is being sold is referred to as capital gain from MFs. No capital gain will accrue on transmission of MF units,” mentioned S Ravi, Former Chairman of BSE and Founder & Managing Partner of Ravi Rajan & co.
“Capital gain will be applicable on redemption of mutual funds by the nominee/nominees and the period of holding will be taken from the date of original investment to the date of redemption,” he added.
The holding periods for the determination of quick-term and lengthy-term capital gains are, even so, distinctive for debt and equity mutual funds.
Explaining the provisions of capital get tax for debt and equity funds, Dr. Surana mentioned, “The manner of computation of capital gains tax would vary depending upon the type of the mutual fund i.e. whether it is a debt oriented fund or equity oriented fund”.
As explained by Dr. Surana, the provisions are described beneath:
Equity Mutual Fund
The computation of capital get with respect to transfer of units of an equity oriented mutual fund would be either classified into lengthy term or quick term gains based upon the period of holding of such units. If the period of holding for the transferor (like the period of holding of the deceased) exceeds 12 months, the gains derived from such fund would be lengthy term in nature, otherwise categorised as quick term. Short-term capital gains would be subjected to tax at 15 per cent ,whereas lengthy-term capital gains would be subjected to tax at 10 per cent u/s 112A more than the threshold limit of Rs 1 lakh and such gains derived upto January 31, 2018 would be eligible to appreciate the advantage of grandfathering and not subjected to any capital gains tax.
Debt Mutual Fund
Similar to equity mutual funds the computation of capital gains tax w.r.t. debt mutual funds are also computed on the basis of the period of holding of the mutual fund units. However, in case of Debt Mutual funds, the gains would be quick term in nature if the holding period is up to 36 months, otherwise, lengthy term. Herein, the quick term capital gains would be subjected to tax at the applicable marginal slab price of the investor/ transferor whereas lengthy term capital gains would be taxed at 20 per cent u/s 112 of the IT Act soon after availing the advantage of indexation.
So, along with the original date of investment by the deceased investor, the advantage of grandfathering will also be applied though calculating capital get tax on transmitted units of equity funds.