Debt mutual fund - loan defaul payout - taxation

Kumar (Others) (105 Points)

13 February 2018  

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!