The Union Budget has granted tax relief to MF investors in merger and takeover situations. Investors will no longer have to bear the burden of paying taxes on capital gains if their fund house gets taken over by another one and their scheme is merged with another one. The budget has also done away with the exemption in service tax for agents as well as distributors of mutual funds. A new Rs 50000 tax break has been granted for investments in pension funds, apart from the 80C limits.


In recent times, many fund houses, mostly foreign ones, such as ING and Morgan Stanley sold their mutual fund businesses to Indian firms. Generally, the fund house that takes over merges the target company’s funds with its own. When this was done, it was treated as ‘redemption’ by the authorities and tax had to be paid on gains made in equity schemes (only if held for short term) and debt funds.

For example if an investor put in money in an equity fund and after six months, the AMC gets taken over by another house, there would be a short-term capital gains tax of 15 per cent payable. Systematic monthly investments too would be affected. This clause has been done away with in this budget and no tax would be payable, if units are not redeemed and merely passed on to the new AMC.

The verdict

Scheme mergers either within fund houses or between them would now be worry-free for investors as they can just stay on with the scheme without shelling out any taxes. The service tax levy would hurt agents and distributors who depend only on trail fees given by fund houses for income. IFAs (independent financial advisers) who are affiliated to fund houses will be affected.

On the separate pension limits, it is not clear if the additional sum can be used towards pension schemes of mutual funds or only to the NPS and annuity plans of insurers.