Mutual fund schemes’ mergers and their tax impact on investors

There are different tax implications for various actions that are undertaken by an investor but often the situation can become complicated. The same action undertaken by different entities could result in a different tax outcome and one has to be alert about these conditions. This is present due to the conditions mentioned with a particular action in the tax laws and this is true with respect to change in the investment in different plans of a mutual fund. If this is undertaken by the investors on their own then the implication would be different from the condition when the mutual fund forces such a move. Here is a look at the situation and the impact on investors.

Change of plan

There are different schemes that are offered by mutual funds. Within a scheme there can be several plans that are present. It could be that the investor finds that a particular plan where they have invested is not suitable for their requirement and they would wish to change their option. This can also happen if the conditions related to the investor have changed and hence they are forced to look at changing their position. This would involve things like shifting from a growth plan to a dividend plan or from a retail plan to some other plan. When this action is undertaken by the investor on their own without any change in the surrounding conditions then the implication that they will face is that of a tax liability. The move of going out of a plan and investing in another plan even though this might be from the same scheme would involve a taxation element. The income tax considers this as a sale of the units in the first plan and a new purchase of units in the second plan so there might be some capital gains that would have to be paid on the initial investment if the unit prices at the time of the change are higher than what they were at the time of the purchase of the units. This could even be short term capital gains if the holding period is less than a year in an equity oriented fund. This puts a burden on the investor and they need to make their calculations as to whether there will be a tax liability in case they make the change.

Mutual fund action

There are times when the investor is left with no choice but find that their plan has changed because this has been forced by the mutual fund. The fund houses often merge various plans in the schemes and this leads to a situation where the investor finds that they are now holding units of some other plan though in the same scheme as earlier. While the mutual fund might make this compulsory the good part is that this will not lead to a tax impact on the investor. There is a provision in the Income Tax Act which clearly says that if the mutual fund merges plans in their schemes then this would not be considered as a transfer and hence there will be no capital gains that can arise. This is a big relief for investors because they can ensure that there is no liability that ensures in such a situation. The mutual fund action thus could prove to be beneficial in the form that there would not be a tax impact however they will have to face with the new conditions in the new plan that they have been given, The other thing that the investor should keep in mind is that the holding period for them would be from the time of the purchase of the initial units in such a case