CBDT makes announcement regarding capital gains on extension of the term of Mutual Funds under the Fixed Maturity Plans

The Central Board of Direct Taxes (CBDT) (TPL Division), New Delhi by Circular No. 6 of 2015 published on 9th April, 2015 has made an announcement in connection with capital gains regarding units of Mutual Funds under the Fixed Maturity Plans on extension of their tenure.
The Circular states that according to the provisions of the Income Tax Act, 1961 before the amendment made by the Finance Act, 2014, assets in the form of shares, securities, units of mutual funds as well as zero coupon bonds were treated as long terms capital assets if such assets were held for a term of more than twelve months as against the time period of more than thirty-six months for other kinds of assets.

Mutual fund as a capital asset:

Accordingly, units of a mutual fund being part of the Fixed Maturity Plans held for more than twelve months is treated as a long term capital asset. The amendment made in section 2 (42A) of the Income Tax Act by the Finance Act, 2014 has amended the period of holding of unlisted shares and units of a mutual fund except an equity oriented fund for their recognition as long term capital asset to the period of over than thirty six months.
For the said reason, gains made out of any investment in the units of Fixed Maturity Plans made earlier and sold after 10.07.2014 would be treated as short-term capital gains if they are held for thirty six months or less.

Fixed Maturity Plans as closed ended funds:

Fixed Maturity Plans are closed ended funds with a fixed maturity date wherein the duration of investment is decided beforehand. The funds collected by means of such plans are invested by the Asset Management Companies in securities having same period of maturity.
To make the Fixed Maturity Plans as a long-term capital assets, some Asset Management Companies administering mutual funds have offered to extend their duration to a date beyond thirty-six months from the date of the investment by providing to the investor an option of their roll-over in accordance with the Regulation 33(4) of the SEBI Regulations, 1996.
Representations have been received in the Board asking for further clarification in connection with the application of tax on capital gains for the unit holder at the time of roll-over of Fixed Maturity Plans having closed ended schemes.
On this issue the Securities and Exchange Board of India (SEBI) has informed that Regulation 33(4) of the SEBI (Mutual Funds) Regulations, 1996 permits the roll-over of the schemes having close-ends. SEBI provides that a close ended scheme shall be fully redeemed at the end of their maturity.
However a close-ended scheme shall be permitted to be rolled over if the object, period and other conditions of the roll over and all other particulars of the scheme including the composition of assets before the roll over, the total assets and net asset value of the scheme, etc. are disclosed to the unit holders and its copy is filed before the Board. Such roll over will be allowed only if such unit holders express their consent in writing and the unit holders who do not prefer the roll over or have not given written consent shall be permitted to redeem their holdings in full.
SEBI has clearly stated that in case of roll- over in accordance with the said regulation, the scheme does not change and it does not constitute a new one.
In case of mutual funds, the unit constitutes a capital asset and any transfer such as through sale, exchange of such unit is a ‘transfer’ as per section 2 (47) of the Act. The roll over according to the said regulation will not be considered as ‘transfer’ as the scheme remains unchanged.
It has been also clarified that no capital gains will arise if the investor opts to continue with the same scheme. The capital gains will arise at the time of redemption of the units.

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