Even if the recovery happens in the next financial year, the value of units on the date of creation of segregated portfolio will not change. Any amount recovered from the segregated portfolio will be considered as capital gain for income tax purposes. However, it is practically not possible to avail indexation benefit in segregated portfolio, as zero multiplied by any number (indexation number) would be zero. A typical SPC structure would consist of the main SPC and multiple segregated portfolios under this main SPC. If your holding period is more than three years, you are eligible for indexation for long-term capital gains. The total gain is the no of units held in the segregated portfolio x 0.255. TAXATION . Taxation on Side Pocketed or Segregated Mutual Funds Now let us jump into the taxation part of this segregation or side-pocketing Mutual Funds, Let us take an example of the above case. Tax deductibility of premiums not certain; ... Bermuda uses the term "segregated account companies," and the Cayman Islands call them "segregated portfolio companies." Based on these 3 you calculate ⦠Rs.0.1041 and the cost of acquisition of units in the main portfolio will be reduced by that amount i.e Rs.95.9895 for taxation purposes. Now, fund house creates segregated portfolio. In the above example, Rs 5 goes bad and cost of acquisition has brought down to almost zero after segregation. Short term capital gains (if the units are sold before three years) in debt mutual funds are taxed as per the applicable tax ⦠Initially, there was confusion about taxation of proceeds from recovery in the side-pocketed portfolio. Segregated Portfolio taxation âHow Units in Segregated Portfolio be taxed on Redemption? Since there have been multiple defaults, a few mutual funds have resorted to side-pocketing as it cleans the main portfolio and ensures that recoveries are passed on to only those investors who suffered the default. This means ⦠Wish to stay on top of your game? Tax status is clearer â each IC is a separate taxpayer, likely ineligible to file a consolidated federal tax return (# of tax returns = # of ICs + 1 for the âcoreâ) ... âSingularâ summarizes all segregated portfolio ⦠segregated portfolio in the Scheme in case of a credit event. It has full capacity to undertake any object or purpose ⦠Segregated funds avoid double taxation through elections One potential problem with investment funds is the correct allocation of capital gains. For instance, if original cost of acquisition of units is Rs.10 and after segregation, the cost of units in main portfolio comes down to Rs.8 and Rs.2 in segregate portfolio, investors will have to ⦠Removing all the doubts in the minds of the genuine investors. Then the cost of the segregated portfolio will be 10% of Rs 10 NAV cost â which is Re 1 â and the cost of main portfolio would be Rs 9. Assume that ⦠the original date of acquisition of total portfolio & cost of acquisition is the proportionate cost Initially, there was confusion about taxation of proceeds from recovery in the side-pocketed portfolio. Any amount recovered from the segregated portfolio will be considered as capital gain for income tax purposes. If fund house incorporated side pocketing in a scheme, the date of acquisition of segregated portfolio was the date of creation of main portfolio and segregated portfolio. When a fund carves out a segregated portfolio from the main scheme, these ⦠As a result, segregated funds can also have more restrictions on when withdrawals are able to be made or liquidated from the portfolio with a fee if the transaction occurs before maturity. Some domiciles ⦠Currently, the date of cost of acquisition of segregated portfolio is the same as the date of cost of acquisition of main portfolio. Debtguru Joydeep Sen is a corporate trainer and author. As a Harris Douglas Segregated Portfolio client, you will have access to: Discretionary portfolio management in segregated portfolios; Your own dedicated Portfolio Manager who will work with you, your lawyer, accountant and other professionals; Detailed Financial Planning for your retirement, tax⦠LEAVE A REPLY Cancel ⦠As and when any recovery happens in the segregated portfolio, fund houses transfer the proceeds to unit-holders. Segregated portfolio ⦠Another key development was computation of cost of acquisition of units in segregated portfolio. Any amount recovered from the segregated portfolio will be considered as capital gain for tax purposes. Treating each segregated portfolio in a structured finance transaction as a separate tax entity would con- form the tax treatment with the commercial reality and ⦠The unique characteristic of an SPC is the ability to isolate the assets and liabilities of different segregated ⦠The Companies Law of the Cayman Islands of 1998 (Part XIV) was originally enacted to follow several other countries and tax ⦠Read: Taxation on Segregated Portfolio in a Mutual Fund Scheme The circular issued by SEBI said that the creation of a segregated portfolio of unrated debt instruments would be permitted only post the âactual defaultâ of either the principal or interest amount. However, the finance minister gave clarity on taxation of proceeds from side pocketing in the Union Budget 2020. INTRODUCTION Part XIV of the Companies Law of the Cayman Islands provides for the establishment of a Cayman Islands exempted company as a segregated portfolio ⦠If the fund house recovers 40 paisa, you do not have to pay tax as the value of segregated portfolio is higher. When investors withdraw any of their investments, their share of the unrealized gains or losses remain within the fund, which could cause a double taxation ⦠Mutual Fund. Taxation aspects. How Mutual Fund Benchmarks helps in selecting the Right Fund for you? There are some practical complication related to taxation of side pocketing. Each individual segregated portfolio may be dealing with a different form of activity. With the passing of more than 18 years since Segregated Portfolio Companies (âSPCsâ) were introduced into Cayman Islands law, the Cayman SPC is now regarded as an established option for international ⦠When a fund carves out a segregated portfolio from the main scheme, these ⦠We often find that the tax nuances of segregated funds are glossed over, with a general, high-level comparison to non-registered mutual fund trusts. If fund house incorporated side pocketing in a scheme, the date of acquisition of segregated portfolio was the date of creation of main portfolio and segregated portfolio. Here the cost of acquisition of units in the segregated portfolio will be Re 1/ Rs 96 i.e. The cost of acquisition of units in segregated portfolio will be the ratio of value of defaulted units and total value of the main portfolio. It is possible that your clients end up paying no taxes if the recovery is less than the original value of units at the time of creation of segregated portfolio. Simultaneously, the cost of acquisition of units in the main portfolio will be reduced to the extent of cost of acquisition in the segregated portfolio. Since more than three years have passed since the purchase of the units, this will qualify as LTCG. ã º½=Kjï«ãÁNèf´=³_2W"Í¢sñtÑÞîèüMªWw7u{smói Hence, the NAV of the segregated portfolio shall be Rs 4%* 30* 100% = Rs 1.2. Currently, units in the side pocket are considered created on the day the portfolio is segregated and not on the day the original investment was made for taxation purposes. â (hh) in the case of a capital asset, being a unit or units in a segregated portfolio referred to in sub-section (2AG) of section 49, there shall be included the period for which the original unit or units in the ⦠With no official corporate tax rate (although in reality works out to about 13%), the Cayman Islands offers an extremely flexible and versatile range of investment vehicles, including their Cayman segregated portfolio ⦠Let us say the NAV of a scheme is Rs 100. Page 4 of 13 1. When a fund carves out a segregated portfolio from the main scheme, these reflect in the investorâs ⦠Now, you have 5000 units in the main portfolio and 5000 units in the segregated portfolio⦠First, the purchase price has to be inflated using the cost inflation index (indexation) and then 20% tax ⦠The Budget 2020 has amended the Income-Tax Act, 1961 to provide clarity with regard to the tax treatment of capital gains from the segregated portfolio. Get daily tips, ideas and articles to grow your business. US: Tide turning for the better; how should Indian investors make the most of it? The concept of an SPC is that a company, which remains a single legal entity, may create segregated portfolios (Portfolios) such that the assets and liabilities of each Portfolio are legally separate from the assets and liabilities of any other Portfolio and fr⦠The segregated portfolio company (SPC), which is a type of exempted company, was first introduced in the Cayman Islands in May 1998 by an amendment to the Companies Law (Revised). Under Cayman Companies Law, an SPC is an exempted company which has been registered as a segregated portfolio company. A Cayman Islands Segregated Portfolio Company (SPC) is an exempted company with protected portfolios or cells. A segregated portfolio company (or SPC), sometimes referred to as a protected cell company, is a company which segregates the assets and liabilities of different classes (or sometimes series) of shares from each other and from the general assets of the SPC.. This aspect is important for capital gains calculation. According to the taxation norms, the original date of acquisition of main portfolio will be considered as date of acquisition for taxation purposes in in the segregated portfolio. Debt funds or bank/corporate deposits, which is better? Once the cost of acquisition is known, the taxation of capital gains ⦠The value of the portfolio becomes Rs 96. Where do you see BSE Sensex on Dec 31, 2021. Ç@¦¹ÐéÀ(¤d Ü\.Û!.½Àe*@Û`ý8ôjz(. A segregated fund is an investment pool structured as a deferred variable annuity and used by insurance companies to offer both capital appreciation and death benefits to policyholders. If recovery happens twice, say 20 paisa and 15 paisa in 2 instalments, you still need not pay the tax. ⦠On the other hand, investors may be benefited due to piecemeal recovery in segregated portfolio. At present both capital gains tax on the main portfolio and segregated portfolio are the same as debt fund taxation. The Board of Directors of the AMC and Trustee have approved the above proposal in their meetings held on January 28, 2019 and February ⦠The cost of acquisition in the segregated portfolio shall be = NAV of the troubled asset immediately before side-pocketing/NAV of the Fund immediately before sideâpocketing Holding ⦠Thanks.. GBU. Budget 2020 through Finance Bill 2020 has amended the income tax provisions related to segregated portfolios of mutual funds and provides clarity as to the taxation of Segregated portfolios of Mutual Funds and how the cost of acquisition is considered in case mutual funds are segregated ⦠In December 2018, SEBI allowed creation of segregated portfolio in mutual fund schemes, popularly known as side pocketing. Of this, Rs.5 goes becomes Rs.1 due to default. Taxation of Segregated Portfolio: You know that to calculate Capital gains taxes in Mutual funds, you need 3 things Cost value, Tenure of Investment Holding and Redemption value. ‘Why annuity makes sense for retired individuals to generate regular income’, Right tool for portfolio management: Creating future-ready MFDs/advisors, The Spirit Unchained – how the change in sub-broker model will change the distribution landscape, ‘With growth becoming more broad-based, the polarization in equity market should reverse’, ‘Equities have underperformed government bonds for over 10 years’, FAQ on SEBI RIA regulations and its impact on MFDs, A difficult subject or issue is explained in a very simple manner.. Itâs important to do a deeper dive, and really understand the tax reporting considerations on segregated ⦠It means segregating a bad apple from a debt fund portfolio and putting it in a separate basket, so that the main basket does not look bad. 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