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Saturday, August 2, 2014

Is switching of funds taxable (QandA : 010)

Question : 010
Is switching of funds taxable?
Let us say you want to switch from one mutual fund to another (of the same or another company) fund in less than 12 months. Will the switching attract short term capital gains tax?

Answer : 010
Yes, Switch in and switch out would be treated as transfer for the purpose of deciding whether a transaction is liable to capital gains tax.
In case of switch in/out, an individual merely moves out of one fund and moves into another fund. This is tantamount to selling your funds from one mutual fund house and buying some funds in a different mutual fund house.
Let's take an example:
Mutual Fund NAV (Rs) Units Value (Rs)
XYZ (Switch Out Unit) 12 1000 12000
ABC (Switch In Unit) 15 800 12000

As you can see in the above example, the individual effectively sells a particular unit and buys another unit with the sale proceeds. Please note that the money does not flow into the hands of the investor but the sale proceeds is reinvested in another unit that may have a unit value higher/lower than the one being sold. Accordingly the number of units may be reduced/increased due to the unit NAV. 

So, be careful before you switch mutual funds. Your broker or fund house may not warn you from the taxation angle, but you ought to take care, for it is your money.

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Manoj Arora
Freedom can buy you....what money cannot !!

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