Circular No. 6 of 2015
F. No. 133/39/2014-TPL
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
Dated 9th April, 2015
Subject: Capital gains in respect of units of Mutual
Funds under the Fixed
Maturity Plans on extension of their term
As per the provisions of the Income-tax Act, 1961 (hereinafter referred
to as the Act) prior to the amendment made by the Finance (No.2) Act, 2014,
assets in the nature of shares, listed securities, units of mutual funds and zero
coupon bonds qualified as long term capital assets if held for a period of more than
twelve months as against the holding period of more than thirty-six months in case of
other assets. Accordingly, units of a mutual fund under the Fixed Maturity Plans
(FMPs) held for a period of more than twelve months qualified as long term capital
asset. The amendment in sub-section (42A) of section 2 of the Act by the Finance
(No.2) Act, 2014 changed the period of holding in case of unlisted shares and
units of a mutual fund (other than an equity oriented fund) for their
qualification as long term capital asset to more than thirty-six months. As a
result, gains arising out of any investment in the units of FMPs made earlier and
sold/redeemed after 10.07.2014 would be taxed as short-term capital gains if the
unit was held for a period of thirty-six months or less.
2. FMPs are closed ended funds having a fixed
maturity date wherein the
duration of investment is decided
upfront. The funds collected by FMPs are invested by the Asset Management
Companies (AMCs) in securities having similar maturity period. To enable the FMPs to
qualify as a long-term capital asset, some AMCs administering mutual funds have offered
extension of the duration of the FMPs to a date beyond thirty-six months from the date
of the original investment by providing to the investor an option of roll-over of
FMPs in accordance with the provisions of Regulation 33(4) of the SEBI (Mutual Funds)
Regulations, 1996. In this regard representations have been received in the
Board seeking clarification regarding applicability of tax on capital gains in the
hands of the unit holder at the time of roll over of FMPs that are closed ended
3. In this matter the
Securities and Exchange Board of India (SEBI) has informed that Regulation
33(4) of the SEBI (Mutual Funds) Regulations, 1996 allows the rollover of
close-ended schemes. Such regulation provides the following:-
“(4) A close ended scheme shall be
fully redeemed at the end of the maturity period: Provided that a close-ended
scheme may be allowed to be rolled over if the purpose, period and other terms
of the roll over and all other material details of the scheme including the likely
composition of assets immediately before the roll over, the net assets and net
asset value of the scheme, are disclosed to the unitholders and a copy of the
same has been filed with the Board:
Provided further that such roll over will be permitted only in the case
of those unitholders who express their consent in writing and the unitholders
who do not opt for the roll over or have not given written consent shall be
allowed to redeem their holdings in full at net asset value based price.”
clarified that in case of roll over in accordance with the aforesaid regulation
the scheme remains the same and it does not constitute a different scheme.
4. In the case of mutual
funds, the unit of a mutual fund constitutes a capital asset and any sale, exchange
or relinquishment of such unit is a ‘transfer’ under clause (47) of section 2
of the Act. The roll over in accordance with the aforesaid regulation will not
amount to transfer as the scheme remains the same. Accordingly, it is hereby
clarified that no capital gains will arise at the time of exercise of the
option by the investor to continue in the same scheme. The capital gains will,
however, arise at the time of redemption of the units or opting out of the
scheme, as the case may be.
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