Consolidating and consolidated scheme
Also written Consolidating scheme · Consolidated scheme
The mutual fund merger pair — the consolidating scheme is merged away, the consolidated scheme is merged into — where the exchange of units is not treated as a transfer for tax.
In plain language
When two mutual fund schemes are merged, one of them disappears and its unit-holders get units of the surviving scheme instead. The workbook has names for the two sides: the consolidating scheme is the one being merged away, and the consolidated scheme is the one it merges into.
Ordinarily, giving up units in one scheme for units in another would look like a sale — a taxable transfer. The Income Tax Act says otherwise here: this exchange is not treated as a transfer, so there is no tax at the moment of merger, only when the unit-holder eventually sells the new units.
How it works
The exemption applies only within like categories: the merging schemes must be either both equity-oriented funds, or both funds other than equity-oriented — an equity scheme cannot be merged with a debt scheme under this exemption.
Because no transfer is deemed to occur, two figures carry over unchanged from the consolidating scheme to the consolidated scheme:
- Period of holding — the time the units were held in the consolidating scheme counts towards the holding period of the new units in the consolidated scheme.
- Cost of acquisition — the cost of the new units in the consolidated scheme is deemed to be the cost of the units originally held in the consolidating scheme.
Only when the unit-holder later sells the consolidated scheme's units does capital gains tax apply, computed using that carried-over cost and holding period as if the original units had never been exchanged.
A worked example
Illustrative figures.
Mr Sinha holds units in "XYZ Debt Fund A", bought for Rs 2,00,000 on 1 April 2020. In 2023, the AMC merges Debt Fund A into "XYZ Debt Fund B" — a fund of the same, non-equity-oriented category. Mr Sinha receives units of Fund B in exchange.
Because both are non-equity-oriented schemes, the merger is not a transfer. No capital gains tax arises in 2023. Mr Sinha's cost of acquisition for the Fund B units remains Rs 2,00,000, and his holding period is still counted from 1 April 2020 — not from the date of the merger.
When he eventually redeems the Fund B units in 2026, his gain is computed against that carried-over Rs 2,00,000 cost and the full six-year holding period, exactly as if he had held Fund B units the whole time.
Why NISM asks about it
Chapter 13 (Tax Provisions for Special Cases), section 13.9, covers taxation on consolidation of mutual fund schemes or plans, setting out the transfer exemption and the carried-over cost and holding period. Expect a question testing the like-category condition (equity with equity, other with other) and the carry-over rule for cost and holding period.
Common exam traps
- The exemption needs matching categories — equity-oriented with equity-oriented, or non-equity with non-equity. Mixing categories does not qualify.
- No tax at the point of merger — the taxable event is deferred to eventual sale of the consolidated scheme's units.
- Cost and holding period both carry over unchanged — this is not a step-up or reset.
- Consolidating = disappears; consolidated = survives. The naming is easy to reverse under exam pressure.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Consolidating planThe same transfer exemption as a scheme merger, but applied one level down — to merging two plans within a single mutual fund scheme, such as combining sub-plans of the same fund.
- Consolidation of sharesA company merging several of its shares into fewer, higher face-value shares without changing total share capital — not treated as a transfer, so the old cost of acquisition is simply apportioned.
- Debt oriented fundA mutual fund category investing mainly in debt securities and interest-bearing instruments — lower return than equity funds, but considered safer — with tax treatment that hinges on when the units were bought.
- Equity-oriented fundA fund that puts at least 65% of its proceeds into listed domestic equity shares — the tax definition that unlocks the 12.5% long-term rate and the Rs 1,25,000 annual exemption.
- Taxation of winding-up proceedsMoney a unit-holder receives when a mutual fund scheme is wound up is treated like a normal redemption amount - so the ordinary capital gains rules for that scheme apply to it.
- Winding up waterfallThe order in which a wound-up scheme's sale proceeds are used: liabilities due and payable first, then a provision for winding-up expenses, and only the balance to unit-holders.