Continuing A Fund Post Maturity Without Redemption Or Transfer
Investors can avoid capital gains tax by re-investing in specific assets
Dear Team, I have invested in the closed-ended fund "L&T Emerging Opportunities Fund - Series I" maturing on Apr 16th 2021. Please advise if after maturity, can the fund continue without redemption (or) transfer to another fund? I want to avoid capital gains tax due to lumpsum gain on maturity and want to continue in the fund and do an SWP to spread the gains over several months.
For the details of the fund pertaining to continuity without redemption or transfer to another fund, it is advisable that the investor refers to the issue documents of the scheme.
In case of such transfer by an investor of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund would be exempt u/s 47(xviii) of the IT Act provided that the consolidation is of two or more schemes of an equity-oriented fund or of two or more schemes of a fund other than equity-oriented fund. In other words, if the transfer is made from one equity-oriented mutual to another equity-oriented mutual, such transfer would not be subject to tax under the Income Tax Act, 1961.
Since the said Scheme allows for a Systematic Withdrawal Plan (SWP) option, the investor may choose to spread his gains over the period. Since the said Fund is an equity-oriented fund, the investment in such fund has to be held for more than 1 year in order for the same to be qualified as a long-term capital asset and the gains derived from such fund would be long term capital gains, otherwise short term. In this case, he would be subjected to capital gains tax @ 15 per cent on short term capital gains u/s 115A whereas 10 per cent on long term capital gains exceeding Rs 1,00,000 u/s 112A of the Income Tax Act.
From a taxation perspective, the investor may avoid paying capital gains tax by way of re-investing the proceeds in other specified assets provided the investment in such fund has been held for a long term.
Suresh Surana is the founder of RSM India