After a spate of bad news, debt fund investors have reason to cheer. Last week, some funds with segregated portfolios containing Vodafone Idea bonds received the full value of the principal due, with interest. The recovery meant money tied up in units in the segregated portfolios was returned to unitholders immediately. In another development, Zee Learn also repaid all dues to UTI MF after the fund house segregated its bonds a few days ago.
While this is welcome news, it does mean some tax headaches for investors. There are two things to be figured out: the cost of acquisition of units in the segregated portfolio and the holding period of the units in the segregated portfolio. Any amount recovered from the segregated portfolio will be considered as capital gain for income tax purposes. When a fund carves out a segregated portfolio from the main scheme, these reflect in the investor’s account statement as a separate portfolio with equal number of units as held in the main portfolio.
Date of acquisition First, investors have to ascertain the holding period of the units in the segregated portfolio. As per a recent amendment to the Income Tax Act, the date of acquisition of the units in segregated portfolio is the same as when you purchased the original units in the main portfolio. The date of side-pocketing is irrelevant. “If the units were purchased in a staggered manner over time, the relevant date of acquisition will be applicable for corresponding units in segregated portfolio,” points out Feroze Azeez, Deputy CEO, Anand Rathi Wealth Management. For instance, if the unitholder had 500 units in the main portfolio before segregation, with 300 units acquired in January 2016 and another 200 units in January 2019, the same dates will apply for the 500 units in segregated portfolio.
Depending on the holding period, the capital gains may be classified as short or long term. Holding period less than 36 months is treated as short term capital asset and the gains are taxed at marginal tax rate. Any holding beyond three years will be considered as long term capital asset and taxed at 20% with indexation benefit. Taking the above example, if you receive payout from the segregated portfolio on 15 July 2020, the first 300 units will qualify as long term capital assets and the remaining 200 will be treated as short term capital asset and taxed accordingly.
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