What will be taxation on capital gains if the primary holder of a joint account for mutual funds (MFs) dies and the survivor decides to redeem the units soon after. Consider a scenario where the joint account holders invested in an MF equity linked savings scheme (ELSS) on 1 January 2023. Soon after the death of the primary holder in early 2024, the units are transferred to the second account holder’s folio. There is a lock-in period of three years for ELSS MF but this is not valid post the transmission of units. What is the taxation if the survivor receives the MF units on 10 April and redeems it within 10 days?
—Gurtejinder
From the facts provided, we understand that as per the joint holding policy of the fund (anyone or survivor), units of the ELSS fund would be transmitted to or inherited by the surviving account holder. Also, the lock-in period of three years is not applicable for the survivor. As per the provisions of the Income-tax Act, inheritance does not qualify as ‘transfer’ and hence, no capital gains would arise at the time of transmission of the MF units.
As and when such units are further sold (subject to any specified lock-in provisions of the fund), the survivor would need to pay capital gains. Any gain or loss arising from sale of ELSS funds held for a period of more than 12 months prior to their sale is considered as long-term capital gain (LTCG) or long-term capital loss (LTCL). Else, the same shall be considered as short-term capital gain (STCG) or short-term capital loss (STCL).
Cost indexation
LTCG in excess of Rs1 lakh is taxable at the rate of 10%, whereas STCG is taxable at 15%. Please note that for calculating the period of holding of such inherited units, the period for which the asset was held by the previous holder, in this case, the deceased, shall be considered. For the purpose of calculating LTCG, the cost of acquisition shall be the actual cost borne by the deceased. Accordingly, since the period of holding exceeds 12 months for inherited and survivor’s share, the same shall be considered to be a sale of long term capital asset and any gains shall be taxable at 10% (for LTCG exceeding Rs1 lakh). No benefit of cost indexation is available while calculating tax on LTCG of such securities transaction tax (STT) paid ELSS.
Also read: Income tax benefits on second home loan — Explained
Please note that the above is subject to the lock-in provisions applicable for the scheme. In case the ELSS fund is sold within the specified lock-in period, any impact of tax benefit or deduction claimed at the time of investing of the fund will need to be separately evaluated.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.
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Published: 28 Apr 2024, 02:38 PM IST