Income Tax Impact of Switching in Mutual Funds

Investment in mutual funds is considered the best way to grow your funds. There are several benefits of mutual funds which make it worth investing in rather than keeping your funds locked and idle.

Along with several benefits, the mutual fund investment helped investors to treat tax for switching transactions related to ULIPs.

However, one of the barriers while investing is to switch in and switch out in mutual funds. Are you planning to switch your mutual fund plan?

Let’s understand the complete process to perform the switch.

Switching in mutual funds refers to the process of shifting investments from one plan to another one within the same mutual fund. While making in mutual funds, there may be several implications of capital gains tax and exit load since it is considered as a sale transaction.

Switching is not possible between two schemes which belong to two different fund companies.

How to Switch to Mutual Funds?

One can choose to switch to mutual funds online or offline. For easy accessibility, it is better to opt for an online method that takes some minutes to make the process complete.

Let’s understand both online and offline modes for switching to mutual funds.

1. Online Mode

You will be available with three options in which you can perform an easy switch.

  • Direct Mutual Fund Platforms- There are several mutual fund platforms available which allow you to perform the switch easily. By choosing the best platform, you will be offered several mutual fund plans to choose from.  The selected platform will direct your switch request to the Registrar & Transfer Agent (RTA). This method is considered one of the most preferred ways to switch to mutual funds.
  • Asset Management Company (AMC)-With this method, you will switch through AMC websites which is quite an exhaustive process mostly if you want to switch funds invested in different AMCs.
  • Register & Transfer Agent (RTA)– In this method, you have to visit the official RTA website for performing the switch. You need to fill up a form for requesting a switch. Here, you are available with the option to switch your funds full or partially.

2. Offline Method

In offline mode, you will be required to visit the nearest RTA or AMC branch to perform the switch. Also, you need to fill up a form and submit it properly to switch your mutual funds. The biggest drawback of performing switch offline is that you will have to visit all the AMCs where you have made investments.

Impact of Income Tax on Mutual Funds

  • According to the current income tax laws, switching to mutual funds is considered as a sale and purchase for the destination scheme which attracts capital gains tax.
  • Switching within the same mutual fund scheme from growth to dividend option and from regular to direct plan is defined as transfer and is also liable to capital gains tax. It happens even though the fund invested remains in the mutual fund plan and there are no gains because the portfolio within the scheme remains unchanged.
  • Within the same ULIP of insurance companies, switching of investments to another is not defined as a transfer and also not exposed to any capital gains tax.
  • According to the budget 2021, the mutual fund ministry announced that there should be uniformity in the tax treatment in case of switch transactions related to ULIPs and mutual funds.
  • Transfer of mutual fund units from one scheme to another under the process of consolidating the plans within the mutual fund schemes is not considered as transfer and also not charged to capital gains.

Tax Rates

Mutual fund transactions are governed by capital gain tax, one will go either for short-term or capital gains tax. If you are switching from old to new or switching is performed within the schemes is regarded as redemption.

For example, If one decided to switch from a regular to a direct plan, he will have to pay capital gains tax. As the switching process is defined as redemption, tax is levied. Below given table shows several tax rates for short term and long term funds-

Below given table shows the calculation of tax on mutual funds:

IncomeEquity Funds TaxationNon-Equity Funds Taxation
The holding period for Long term capital gains1 year(minimum)3 years
Short term capital gains15% + 4% cess = 15.60%As per the tax rate of the investor (30% + 4% cess = 31.20% for investors in the highest tax slab)
Long term capital gains10% + 4% cess = 10.40% (if the long term gain exceeds Rs 1 Lakh)20% with indexation
Dividend distribution tax10% + 12% surcharge + 4% cess = 11.648%25%+ 12% surcharge +4% cess = 29.120%

How Profits from Mutual Funds are Taxed?

  • The long term capital gains are currently taxed at the rate of 10% if it exceeds Rs 1 lakh in a financial year. It is based on how much LTCG arises out of the sale of listed equity shares and the units of equity-oriented mutual fund schemes.
  • Inequity mutual funds, short-term capital gains are taxed at the rate of 15%.
  • Long-term capital gains after index adjustment are taxed at the rate of 20% on debt mutual fund units that are held for more than 36 months.
  • Short-term capital gains are taxed as per the applicable slab rate on units that are held for 36 months or less and are added to the individual’s income.

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About FinanceGAB

Ajeet Sharma is a financial blogger and I am blogging since 2017. Financegab is a personal blog dedicated to personal finance. The main aim of this blog to help people to make well-informed financial decisions.
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