Switching in the meaning of mutual funds refers to the process of shifting your investments from one fund plan to another within the same mutual fund. There may be indications of exit load and capital gains tax while making intra-mutual fund switch (growth plan to pay or regular plan to direct plan) since it is currently deemed a sale transaction for the source scheme. It is to be regarded that switching is not possible between two schemes belonging to two different fund families.
Here are 5 things to know:
1) Under current pension tax laws, switching is considered as a sale or redemption for the source system and a purchase for the destination scheme and brings capital gains tax.
2) Switching of investment in systems within the same scheme of a mutual fund from growth option to dividend option (or vice-versa), and from regular plan to show plan or (or vice-versa) is considered a “transfer" and is therefore subject to capital gains tax, even though the amount invested remains in the common fund scheme, even though there are no realized gains, as the underlying protection/ portfolio remains unchanged within the scheme.
3) However, the switching of properties to/from investment plans to another within the same Unit Linked Insurance Plan (ULIP) of coverage companies is not considered as a “Transfer" and hence, not reduced to any Capital Gains Tax.
4) The mutual fund industry in its recommendations for Budget 2021 has said that "there is need to have unity in the tax treatment for “switch" transaction in respect ULIPs and common fund products to have a level playing field.
5) It is to be noted the transfer of units of a common store from one plan to another under the method of consolidation of the plans within schemes of mutual funds are not considered as transfer and hence, not charged to capital gains.
How profits from mutual funds are currently taxed:
Currently, long-term capital gains (LTCG) rising out of the sale of listed equity shares and links of equity-oriented mutual fund schemes are now taxed at the rate of 10%, if the LTCG exceed ₹1 lakh in a business year ( gains up to January 31, 2018, is grandfathered).
Short term capital gains (if the units are sold before one year) inequality mutual funds are required at the rate of 15%.
Long term capital gains on debt mutual fund systems held for more than 36 months are taxed at 20% after modifying for indexation.
Short-term capital gains on systems held for 36 months or less are added to the income of the individual and taxed as per the appropriate slab rate.