In the first part of this article, we covered the tax rules with regard to all categories of mutual funds. You know that with mutual funds, taxes apply in your hands at the time of your redeeming your fund and that your tax liability depends on how long you held the fund.
If you sold all your units at one go, and bought it on a single date, it is easy to arrive at the holding period. But what if you redeemed in multiple tranches? What if you had invested at multiple points, like you do in an SIP? How then do you calculate what your holding period is, and consequently, what tax applies?
Determining holding periods
The rule the taxman follows is that the first unit you bought is the first you sold. This first-in-first-out rule also applies while determining whether units of tax-saving funds are free from lock-in.
Here’s an example to make it more clear. Let’s say you invested in a fund at various points of time as below:
Now, you have a total of 290 units today. You decide to sell 100 units. Going by the rule, thus, it’s assumed that the 50 units bought on the 10th Jan 2012 and 50 of the units bought on 18th December 2012 are sold. If the fund is an equity fund, you won’t pay capital gains tax as the holding period of the units is greater than one year. If it was a debt fund, since the holding period from January and December 2012 is longer than three years, you will pay long-term capital gains tax. What if you sold all 290 units? If it’s an equity fund, for the units bought in July and November 2015 (100 units), you will pay short-term capital gains tax as the holding period is less than a year. On the remaining 190 units, you pay no tax. If it was a debt fund, then, the 160 units you bought from September 2013 onwards will qualify as short-term. The 130 units you bought between January and May 2013 will qualify as long-term.
In other words, the holding period of every unit that you bought would be from the date of such unit’s purchase.
Consider a systematic transfer plan (STP). Apply the rule above. The units you sell is taxed based on the date of its purchase. That’s easy. But what is the date of purchase of the fund you are transferring into? When this money is transferred into another fund, the date of purchase for this fund would be the date when the units are credited to you.
For example, say you are doing an STP from Fund X to Fund Y for Rs 1000 a month. The date of sale for X fund would be the date of STP. For the Y fund, the date of purchase would be when new units are credited to you under Fund Y. This is the case with any switch-out and switch-in of funds.
Thus, date of purchase remains a key input for you to determine your holding period.