As per the Income Tax Act, assets in the nature of shares, listed securities, units of mutual funds and zero coupon bonds qualified as long terms capital assets if held for a period of more than twelve months. In case of other assets, holding period of more than thirty-six months qualify for long term capital 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.   

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.

The amendment in sub-section (42A) of section 2 of the Act by the Finance (No.2) Act, 2014 via F. No. 133/39/2014- TPL, changed the period of holding in case of unlisted shares and units of a mutual found (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 were held for a period of thirty-six months or less.

T o 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. An option provided to the investor to roll-over of FMPs in accordance with the provisions of Regulation 33(4) of the SEBI (Mutual Funds) Regulations, 1996.

Concerning the above amendment, confusion aroused regarding applicability of tax on capital gains in the hands of the unit holder at the time of rollover of FMPs that are closed ended schemes.

The Securities and Exchange Board of India (SEBI) has clarified that Regulation 33(4) of the SEBI (Mutual Funds) Regulations, 1996 allows the rollover of close-ended schemes and provides:

• A close ended scheme shall be fully redeemed at the end of the maturity period.
• For a close-ended scheme may be allowed to be rolled over if:
• Disclosed to the unit holders and a copy to be filed with the Board– 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
• Consent in writing- Roll over will be permitted only in the case of those unit holders who express their consent in writing.

Note: 1. The unit holders 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.

2. SEBI has 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.

Any sale, exchange or relinquishment of unit of Mutual Fund is a ‘transfer’ under clause (47) of section 2 of the Act. SEBI clarified that the roll over in accordance with the aforesaid regulation will not amount to transfer as the scheme remains the same. Accordingly, no capital gains shall arise at the time of exercise of the option by the investor to continue in the same scheme. However, the capital gains shall arise at the time of redemption of the units or opting of the scheme, as the case may be.

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