Transmission takes place after the death of an investor, 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,” said Dr. Suresh Surana, Founder, RSM India.
The recipients of transmitted MF units are, however, not allowed to redeem or switch or transfer such units within 15 days from the date of transmission.
Once the transmitted units are redeemed or switched or transferred any time after the 15-day cooling period, the gain, if any, will become 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,” said Dr. Surana.
But, for the purpose of determining short-term and long-term capital gains, which date will be considered 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,” said Dr. Surana.
“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,” said 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 short-term and long-term capital gains are, however, different for debt and equity mutual funds.
Explaining the provisions of capital gain tax for debt and equity funds, Dr. Surana said, “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 mentioned below:
Equity Mutual Fund
The computation of capital gain with respect to transfer of units of an equity oriented mutual fund would be either classified into long term or short term gains depending upon the period of holding of such units. If the period of holding for the transferor (including the period of holding of the deceased) exceeds 12 months, the gains derived from such fund would be long term in nature, otherwise categorised as short term. Short-term capital gains would be subjected to tax at 15 per cent ,whereas long-term capital gains would be subjected to tax at 10 per cent u/s 112A over the threshold limit of Rs 1 lakh and such gains derived upto January 31, 2018 would be eligible to enjoy the benefit 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 short term in nature if the holding period is up to 36 months, otherwise, long term. Herein, the short term capital gains would be subjected to tax at the applicable marginal slab rate of the investor/ transferor whereas long term capital gains would be taxed at 20 per cent u/s 112 of the IT Act after availing the benefit of indexation.
So, along with the original date of investment by the deceased investor, the benefit of grandfathering will also be applied while calculating capital gain tax on transmitted units of equity funds.