Budget 2023 | Mutual fund industry body seeks tax parity on intra-scheme switching of units

The mutual fund industry body has requested that amendments be made so that switching of units from regular plan to direct plan or vice-versa and growth option to dividend option or vice-versa, within the same scheme of a mutual fund are not regarded as transfer and hence, shall not be charged to capital gains.

Ahead of Budget 2023, Association of Mutual Funds in India (AMFI) has said that intra-scheme switches (i.e. switching of investment within the same scheme of a mutual fund) should be exempt from payment of capital gains tax as no gains are realised in such a case. The mutual fund industry body has requested that amendments be made so that switching of units from regular plan to direct plan or vice-versa and growth option to dividend option or vice-versa, within the same scheme of a mutual fund are not regarded as transfer and hence, shall not be charged to capital gains.

Background

As per Sebi regulations, mutual funds offer ‘Direct Plan’ wherein investors can invest directly, i.e., without involving any distributor/agent and a ‘Regular Plan’, wherein one can invest through a distributor/agent (who gets commission). Direct plan and regular plan are part of the same mutual fund scheme, and have the same/common portfolio, but have different expense ratios (recurring

expenses that is incurred by the MF). Direct Plan has lower expense ratio than regular plan, as there is no intermediary involved.

Under the current tax regime, switching of investments to/from investment plans to another within the same Unit Linked Insurance Plan (ULIP) of insurance companies is not considered as a “Transfer” and hence, not subjected to any capital gains tax.

However, switching of investment in units within the same mutual fund scheme from growth option to dividend option (or vice versa), and/or from regular plan to direct plan (or vice-versa) is considered a “Transfer” under Section 47 of the Income Tax Act, 1961 and is liable to capital gains tax, even though the amount invested remains in the mutual fund scheme, i.e., even though there are no realized gains, as the underlying securities/ portfolio remains unchanged within the scheme.

Thus, there is disparity between tax treatment on switching of investment

within a mutual fund scheme and within a ULIP of insurance companies,

although both MF schemes and ULIPs invest in securities, and are

investment products.

Proposal

It is proposed that intra scheme switches, i.e., switching of investment within the same mutual fund scheme is not regarded as a “Transfer” under Section 47 of the IT Act, 1961 and the same should be exempt from payment of capital gains tax, AMFI said.

“It is therefore requested that a new sub-section under Section 47 of the Income Tax Act, 1961 be inserted, so that Switching of Units from (a)

Regular Plan to Direct Plan or vice-versa; and (b) Growth Option to Dividend Option or vice-versa, within the SAME scheme of a mutual fund are not regarded as transfer and hence, shall not be charged to capital gains,” it said.

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