Capital gain on debt mutual fund or MLD will be always short-term capital gain from AY 2024-25

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Finance Act, 2023 has inserted a new provision by way of Section 50AA of the Income tax act which shall be applicable from AY 2024-25 i.e. FY 2023-24 and according to the provision of Act and debt oriented mutual fund purchased after 01.04.2023 or market linked debentures will always be deemed to be short term capital gain and will be charged to tax accordingly.

Section 50AA of the Income tax act is as under:

“50AA. Notwithstanding anything contained in clause (42A) of section 2 or section 48, where the capital asset is a unit of a Specified Mutual Fund acquired on or after the 1st day of April, 2023 or a Market Linked Debenture, the full value of consideration received or accruing as a result of the transfer or redemption or maturity of such debenture or unit as reduced by—

(i) the cost of acquisition of the debenture or unit; and

(ii) the expenditure incurred wholly and exclusively in connection with such transfer or redemption or maturity,

shall be deemed to be the capital gains arising from the transfer of a short-term capital asset:

Provided that no deduction shall be allowed in computing the income chargeable under the head “Capital gains” in respect of any sum paid on account of securities transaction tax under the provisions of Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004).

Explanation.— For the purposes of this section—

(i) “Market Linked Debenture” means a security by whatever name called, which has an underlying principal component in the form of a debt security and where the returns are linked to market returns on other underlying securities or indices and include any security classified or regulated as a market linked debenture by the Securities and Exchange Board of India;

(ii) “Specified Mutual Fund” means a Mutual Fund by whatever name called, where not more than thirty five per cent of its total proceeds is invested in the equity shares of domestic companies:

Provided that the percentage of equity shareholding held in respect of the Specified Mutual Fund shall be computed with reference to the annual average of the daily closing figures.”

Some important points to consider in case of above section are as under:

1. In the above provision cut-off date for purchase has been mentioned, only for debt oriented mutual fund and no cut-off date has been mentioned for market linked debentures and accordingly market linked debentures whenever purchased will be deemed as capital gain on short term capital asset if sold on or after FY 2023-24.

2. The above provision mentions that it is over-ruling Section 2(42A) – which deals with definition of short-term capital asset and Section 48 which deals with indexation and accordingly, if any asset mentioned above is getting long term as per definition specified in Section 2, same shall still be deemed as short-term capital gain.

3. No deduction of STT shall be available and same is also not available in case of normal capital gains on shares and securities by virtue of Section 55 of Income tax act.

4. Since nothing has been mentioned/ defined about cost of acquisition in this section one need to check Section 55 of the Income tax act to determine the definition of Cost of acquisition.

5. Although the provision of Section 50AA over-rules Section 2(42A) and Section 48 of the Income tax act, however it does not over-rule Section 54F etc. where it talks about long term capital asset and not long-term capital gain. Therefore, if an asset is sold which is long-term capital asset i.e. held for more than 36 months then in such a case one can claim exemption u/s 54F or any other available section.

6. It is important to note that a deeming fiction has been created u/s 50AA wherein all capital gain has been considered as short-term capital gain and hence it is not actual short-term capital asset and accordingly no restriction can be put on availing benefit u/s 54F of the Income tax act.

7. Similar language and deeming fiction has been created u/s 50 of the Income tax act wherein it has been deemed that any capital gain on depreciable asset will be short term capital gain. However, there have been various judgement wherein it has been held that assessee can claim exemption against such capital gain if the asset was a long-term capital asset.

Some of the judgements are as under:

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