How is the money received from shut schemes taxed?

Franklin Templeton has returned about Rs 26,098 crore to the investors of their shut debt mutual fund schemes, so far. Though the investors are yet to receive their money in full, they are relieved at least to some extent on getting back a good portion of their money, along with a hope to get the remaining soon.

However, most investors are now gripped with a query on taxation of the received money. They are wondering if the money received from a shutdown scheme has a different tax treatment. Well, the tax treatment for the amount received from a shut scheme is no different. It is taxed exactly like the gains are taxed from any other mutual fund scheme.

If sold within three years, the realised gains from a debt fund are added to the taxable income and taxed as per the applicable slab. If they are sold after three years, the realised gains are taxed at 20 per cent after providing the benefit of indexation. Indexation helps adjusting the cost of purchase for inflation, thereby reducing the taxable gains.

Segregated portfolios
However, the schemes of Franklin Templeton had also side-pocketed the bad bonds, creating a segregated portfolio, before announcing the closure of its schemes.

In 2018, SEBI permitted the creation of segregated portfolios or side pockets in debt funds in case the credit rating of a bond goes below investment grade. This was primarily done to protect investor interests. This way the fund is protected from the barrage of redemptions and the true investors (who take the hit) are able to benefit whenever the bad debt is recovered.

Gains on the segregated units are also taxed as capital gains. However, while calculating the same, the holding period includes the period for which the units of the main portfolio have been held. So while calculating the holding period for taxation purposes, it is the original date of acquisition (purchase) that one must consider and not the date at which the segregated portfolio is created.

Likewise, the cost of acquisition to consider while calculating gains on such units should be the cost at which the units are transferred to the segregated portfolio. This can be easily checked from your mutual fund statement. In the case of Franklin, units pertaining to a few bonds like Vodafone were transferred to the segregated portfolio at a 'Zero' value. So in such a case, the whole of the received money is taxable.

Still seeking clarity on how the segregated portfolios are taxed? Read this article.