How much tax is levied on switching mutual fund schemes?

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Many people transfer money invested in one mutual fund scheme to another or switch schemes. This could be due to not getting satisfactory returns in the current scheme and wanting to reduce risk. Switching in mutual funds means transferring your investment from one scheme to another within the same mutual fund house. You can switch money from an equity scheme to another equity scheme, equity to debt and debt to equity.

To transfer investment between schemes of different fund houses, you first need to redeem and then invest the money into another mutual fund house’s scheme. Let’s say you currently have investments in mutual fund scheme A and want to transfer them to scheme B of a different fund house. For this, you’ll have to redeem from scheme A, meaning you’ll have to sell the units. The money from redemption will be credited to your bank account. After that, you can invest in scheme B of the other mutual fund house. Capital gains tax is applicable when units of mutual funds are redeemed, i.e., sold.

When transferring investment between different schemes of the same fund house, the money doesn’t come to your bank account directly. Instead, it moves from one scheme to another within the same fund house. However, for taxation purposes, this is still considered a sale or redemption, meaning capital gains tax will be applicable. The amount and type of capital gains tax depend on the nature of the scheme and the holding period.

Investment in equity mutual funds for more than 12 months is considered long-term capital gain (LTCG). Transferring an investment held for more than 12 months to another scheme results in LTCG tax. There is no tax on profits up to one lakh rupees in a financial year. Above this, a 10% tax is applicable on profits. If the holding period is less than 12 months, the profit is considered short-term capital gain (STCG), and a 15% tax is applied.

If an investment is made in a debt mutual fund on or after April 1, 2023, regardless of the holding period, the profit from switching investments will be considered short-term capital gain, which will be included in your income. It will be taxed at the rate applicable to your income tax slab.

If the investment in a mutual fund is made on or before March 31, 2023, indexation benefit will be available. In this condition, if the units of the mutual fund scheme are held for more than 36 months and then switched to another scheme after taking advantage of indexation, a long-term capital gain tax of 20% will be applicable on the profit after indexation benefit. Indexation helps in reducing the tax liability. If the units are sold before 36 months, short-term capital gain tax will be applicable, and tax will be levied on the profit according to the tax slab.