When an investor transfers some or the entire amount from one scheme of a mutual fund to another scheme, he has to request a switch. For this, the transaction form has to be filled.
Tax on Mutual Fund Investment: It often happens that some investors transfer some or the entire amount from one scheme of Mutual Funds to another scheme. Or switch to another option of the same plan. This work can be done both online or offline.
Often the question arises that how does Income Tax look at this shifting of investments. That is, the profit arising from such switching is taxable or tax benefit can be claimed by switching to a new fund (mutual fund switch rules).
If an investor switches some amount from his existing tax saving scheme to a tax saving scheme with growth option from another dividend payout of the same fund house, can he claim tax benefit (mutual fund tax rule) in respect of the amount transferred? could.
Mutual Fund Switch Rules
According to tax and investment experts, when an investor transfers some or the entire amount from one scheme of mutual fund to another scheme, he has to request for a switch. For this, the transaction form has to be filled. Investors have to specify the scheme name, plan and option in which to switch units. Such transactions are subject to exit load and capital gains tax.
For dividend to growth option, money has to be withdrawn from one scheme and invested in another scheme. The portfolio of the scheme is same, but the NAV of dividend and growth option are different. This transaction comes under exit load, hence it attracts capital gains tax. Even if you switch from regular to direct plan, capital gains tax is levied.
ELSS Investments (Equity Linked Saving Schemes)
- HUFs investing in Equity Linked Savings Schemes (ELSS) can claim tax deduction under section 80C. ELSS has a lock-in period of three years, so you will be allowed to switch from the tax saving scheme only after three years. Here the profit made on the original investment will be treated as long term capital gain. Such long-term capital gains on switched ELSS will be taxed at a concessional rate of 10 per cent after the initial one lakh.
- Investments made by converting the old ELSS to a new ELSS scheme in another option of the same scheme will be eligible for tax benefits under section 80C as it is treated as a fresh investment.
- If the investor’s total income does not exceed Rs 5 lakh, then ELSS can be claimed for tax exemption under section 87-A of Income Tax including long-term capital gains.
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