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The concept and Tax effect of Switching in Mutual Funds

The concept and Tax effect of Switching in Mutual Funds

Hi, almost all of us are aware of investing in Mutual Funds and their respective Tax effects. However, some areas still remain Grey for some and one such area is Switching in Mutual Funds.

What is Switching?

It is withdrawal of money from one scheme of Mutual Fund and investing in the other scheme of Mutual Fund without actually bringing withdrawal money to the Bank. Switching can ONLY be done among various schemes of a Mutual Fund Company, thus, only intra-Switching can be done in Mutual Funds.

Example: If one has invested in some scheme of Reliance Mutual Fund then Switching of that amount can only be done among other schemes of Reliance Mutual Fund and NOT from one scheme of Reliance Mutual Fund to a Scheme of HDFC Mutual Fund or other. If it is done it treated as fresh investment in the Mutual Fund scheme.

Benefits of Switching:

You just need to submit a duly filled and signed Transaction form for the same.
No need to wait for Money to get credited to your Bank account because, in Switching, money is transferred directly from one scheme to another.
No need to fill-in a separate application form for the same.
A strategy that can capitalize the opportunity in Mutual Funds whenever the same arrives etc.

Tax effect of Switching:

Tax effects of switching are mainly same as in the case of withdrawal/redemption because almost everything that happens in case of withdrawal and reinvestment happens in case of Switching except that Money does not pass through the bank account. Capital Gains/(Losses) are Taxed in the similar way as in the case of withdrawal from Mutual Fund scheme. Same method is to be followed for computation of duration of investment.

Thus, while finalizing the client’s Statement of Affairs and ITR, one must not only rely on Bank record, one must refer prior years Statement of Affairs and check if any Switching has been done among Mutual Fund schemes, take Tax effect of the same, affect the same in Statement of Affairs and proceed….

The concept and Tax effect of Switching in Mutual Funds,check here


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