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The Central Board of Direct Taxes (CBDT) has made it clear that capital gains will not arise in the hands of an investor at the time of exercising the option of rollover in a fixed maturity plan (FMP) scheme.
Same scheme clause This will be the case as long as the rollover takes place in the same scheme, the CBDT said in a circular. However, capital gains will arise at the time of redemption of the units or opting out of the scheme, it said.
FMPs are close-ended funds having a fixed maturity date wherein the duration of investment is decided upfront.
The circular has come in response to clarifications sought on the applicability of tax on capital gains in the hands of the unit holder at the time of rollover of FMPs that are close-ended schemes. The doubt was whether rollover would be treated as “transfer” and hence subjected to capital gains tax.
“The approach of CBDT on this issue is right and tax-payer friendly,” Milind Kothari, Managing Partner & Head — Direct Tax, BDO India LLP, told BusinessLine .
Will remove uncertainties Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a firm of chartered accountants, said the circular will remove uncertainty in the minds of investors.
The government had in July last year (Budget 2014-15) changed the holding period for unlisted shares and units of a mutual fund (other than an equity-oriented fund) to more than thirty six months for them to qualify as long-term capital asset.
Prior to this, a holding period of over 12 months was enough to categorise the unlisted shares and mutual fund units as long-term capital assets. Accordingly, FMPs held for a period of over 12 months qualified as a long-term capital asset.
With the changed regime in July 2014, some mutual fund houses proposed extending the FMPs’ period to enable investors avail a beneficial tax regime on the capital gains front.
To enable FMPs to qualify as a long-term capital asset, some MFs had offered extension of the duration of FMPs to a date beyond 36 months from the date of original investment by providing investors an option of rollover.
Market regulator SEBI had allowed MFs to roll over their FMP schemes as long as certain conditions were met.
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