Debt mutual fund - loan defaul payout - taxation


Kumar (Others)     13 February 2018

Kumar
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Dear Sirs,

I understand that income made through sale of debt mutual funds (ultra short terrm fund) attract a LTCG if they are sold after 3 years from date of acquisition and STCG when it is less than that.

However, I've strange sequence of events, for which I'm confused on whats the right tax treatment, would appreciate your thoughts on it:

1. I purchase units of a ultrashort term debt mutual fund (Growth option). 70% of those units, were purchased before 3 years. Remaining 30%, 3 years still not elapsed.

2. At this juncture, it turns out that one of the underlying companies that the debt MF invested in, defaulted on its repayment towards the loan to the MF.

3. The AMC therefore duly discloses this to investors and marks down the value of the loans given to that company as 0. Resulting in the NAV of the mutual fund units droping correspondingly.

4. I still continue to hold the debt MF units. (Didn't sell anything).

5. After a while, the AMC is able to recover the defaulted amount periodically from the company.

6. These recoveries, initial where paid into the funds' NAV.

7. However, later recoveries where directly credited to the investors via NEFT. So they don't involved the nav.

Question is:

These payouts that were directly credited to the investors, how should they be considered for taxation?

LTCG? STCG? dividend?

Thanks!

 

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Kumar (Others)     15 February 2018

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Would someone please help?

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Dhirajlal Rambhia (KVO Merau Kutchh)     15 February 2018

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Different ways of adjustment, like if you redeem the units in same FY, then included in the sell proceeds. But if you remain invested, it will reduce your COA.

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Kumar (Others)     15 February 2018

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Dear Sir,

Thank you very much for the reply. Would you be kind enough to elaborate that a bit?

As I said these units were acquired in various dates from 2014 to 2015.

The recovery has not happened fully yet. However, I am allowed to sell the units now itself.

Any recoveries happening after I sell will also be directly paid out to me.

If I sell today, I can include only the proceeds paid out till now to the sell proceeds right? What about recovery proceeds that happen after the sale possibly in Apr 2018?


 

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Dhirajlal Rambhia (KVO Merau Kutchh)     15 February 2018

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If I sell today (FULLY), I can include only the proceeds paid out till now to the sell proceeds right?

YES

What about recovery proceeds that happen after the sale possibly in Apr 2018?

Can offer it to taxation under IFOS, in the year of receipt.
 

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Kumar (Others)     15 February 2018

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Originally posted by : Dhirajlal Rambhia
What about recovery proceeds that happen after the sale possibly in Apr 2018?

Can offer it to taxation under IFOS, in the year of receipt.
 

Thank you once again sir. But to offer under IFOS, I wouldn't know the cost acquisition for this.

Since I purchased MF Units, it is not clear how much of that was allocated to this particular company and when it was allocted, since that was done by the AMC as part of managing the fund.

 

Here is what I'm planning to do: Currently about 70% of the units I hold are more than 3 years old. Recoveries made thus far amount to 50% of the total recovery to be made. So I'm planning to redeem 50% of these units and I will include the recoveries paid out to me thus far as well to the redemption consideration for computation of capital gains and will pay LTCG on this. Hopefully in Apr2018  the remaining recoveries will have been made and paid out to me. At that point I intend to redeem off the remaining units and similarly will include the recoveries paid out in computing CG and will pay LTCG for that also.

Is this reasonable?

 

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Dhirajlal Rambhia (KVO Merau Kutchh)     15 February 2018

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Yes, if you are not selling of 100%, this is one is an available option, or better if you offer to tax in current year itself (if you know results before filing return by June-july 2018). Or otherwise you can revise it by year end...........

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Kumar (Others)     15 February 2018

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Originally posted by : Dhirajlal Rambhia
Yes, if you are not selling of 100%, this is one is an available option, or better if you offer to tax in current year itself (if you know results before filing return by June-july 2018). Or otherwise you can revise it by year end...........

 

 

That clarifies it for me. Thank you for your time sir.

I was just scared the IT dept may see the direct payouts as not being from the MF perse and disallow for LTCG/STCG classification for it, rather wanting it to be treated as IFOS or Dividend. So just wanted a perspective that what I'm planning to do is reasonable.

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Dhirajlal Rambhia (KVO Merau Kutchh)     24 February 2018

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Most Welcome......

God Bless All....


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