1. When equity funds are switched, either between two different funds or from Regular to Direct option of same fund, the amount is firstly redeemed by selling units of the "parent" fund, and then utilized for purchasing units in the "target" fund.
2. Any switching of mutual funds is fraught with Capital Gains tax liability, during its redemption activity, but you can still "aim" to switch between funds without paying both tax as well as exit load.
3. Stop current SIP/STP/purchases in your existing fund(s), and start it in the new fund(s).
4. Commence switching existing units more than one year old, and with no exit load, systematically (which will always be on FIFO basis) into the new fund.
3. Stop current SIP/STP/purchases in your existing fund(s), and start it in the new fund(s).
4. Commence switching existing units more than one year old, and with no exit load, systematically (which will always be on FIFO basis) into the new fund.
5. During redemption process, income (or loss) is called capital gain (or loss), which would be long-term (LTCG or LTCL) or short-term (STCG or STCL), if redeemed after or before 1 year respectively, from its actual purchase date (not 31st Jan'2018 which is only a grandfathering date).
6. Its purchase cost, however, will be considered as NAV of 31st Jan'18 (if it's more) for calculating the capital gains, for any purchases prior to this date, i.e. any earnings already accumulated till this date will enjoy grandfathering benefits and would not be included in the capital gains calculation.
7. Besides the grandfathering 31st Jan'18 date/clause, as LTCG tax has been reintroduced after a long time, an additional sop of 1 lakh net LTCG exemption has been allowed during this year (let's hope it continues in future budgets too), for all LTCG gains on equities taken together (shares and MFs), with the net balance taxed at 10%.
8. If NAV on redemption (during switch process) is lesser than NAV during original purchase itself, grandfathering date NAV / clause loses relevance in calculation as there's a capital loss.
9. If redemption NAV is more, but lesser than NAV on 31st Jan'18, then too grandfathering date NAV / clause loses relevance in calculation, although there's a capital gain.
10. Grandfathering date NAV / clause has relevance in calculation of capital gains only when redemption NAV is more than it.
11. For aiming nil capital gains while switching, keep following in mind:-
a) If Switched NAV is lesser than Purchased NAV, there's a capital loss, hence nil tax.
b) If Switched NAV is higher than Grandfathered NAV, but lesser than Purchased NAV, there's still a capital loss, being difference between Switched and Purchased NAV, hence nil tax again.
c) If Switched NAV is lesser than Grandfathered NAV, but higher than Purchased NAV, there's a capital gain, being difference between Switched and Purchased NAV.
d) If Switched NAV is higher than Grandfathered NAV as well as Purchased NAV, there's again a capital gain, being difference between Switched and Grandfathered NAV.
12. If c) and d) occur during switching, utilize 1 lakh annual LTCG exemption, calculating it after grandfathered date of 31st Jan'18, to remain tax-free.
13. As Grandfathering clause makes LTCG from any older Purchase date up to 31st Jan'18 remain tax-free always, provided Switching date of any unit is after 1 year, there is no need to hurry this switching process through lumpsum action, as systematic switching will also enable cost-averaging the new purchases.
14. Remember that:
6. Its purchase cost, however, will be considered as NAV of 31st Jan'18 (if it's more) for calculating the capital gains, for any purchases prior to this date, i.e. any earnings already accumulated till this date will enjoy grandfathering benefits and would not be included in the capital gains calculation.
7. Besides the grandfathering 31st Jan'18 date/clause, as LTCG tax has been reintroduced after a long time, an additional sop of 1 lakh net LTCG exemption has been allowed during this year (let's hope it continues in future budgets too), for all LTCG gains on equities taken together (shares and MFs), with the net balance taxed at 10%.
8. If NAV on redemption (during switch process) is lesser than NAV during original purchase itself, grandfathering date NAV / clause loses relevance in calculation as there's a capital loss.
9. If redemption NAV is more, but lesser than NAV on 31st Jan'18, then too grandfathering date NAV / clause loses relevance in calculation, although there's a capital gain.
10. Grandfathering date NAV / clause has relevance in calculation of capital gains only when redemption NAV is more than it.
11. For aiming nil capital gains while switching, keep following in mind:-
a) If Switched NAV is lesser than Purchased NAV, there's a capital loss, hence nil tax.
b) If Switched NAV is higher than Grandfathered NAV, but lesser than Purchased NAV, there's still a capital loss, being difference between Switched and Purchased NAV, hence nil tax again.
c) If Switched NAV is lesser than Grandfathered NAV, but higher than Purchased NAV, there's a capital gain, being difference between Switched and Purchased NAV.
d) If Switched NAV is higher than Grandfathered NAV as well as Purchased NAV, there's again a capital gain, being difference between Switched and Grandfathered NAV.
12. If c) and d) occur during switching, utilize 1 lakh annual LTCG exemption, calculating it after grandfathered date of 31st Jan'18, to remain tax-free.
13. As Grandfathering clause makes LTCG from any older Purchase date up to 31st Jan'18 remain tax-free always, provided Switching date of any unit is after 1 year, there is no need to hurry this switching process through lumpsum action, as systematic switching will also enable cost-averaging the new purchases.
14. Remember that:
a) Annual 1 lakh LTCG tax exemption is on actual gains booked on switching funds, taken together other equity sales.
b) Switched NAV has to be lesser than Purchased NAV for nil tax liability, as there's capital loss.
c) If Switched NAV is lesser than Grandfathered NAV, but higher than Purchased NAV, there's capital gain, being the difference between Switched and Purchased NAV.
d) If Switched NAV is higher than Grandfathered NAV as well as Purchased NAV, there's capital gain, being the difference between Switched and Grandfathered NAV.
e) If Switched NAV is higher than Grandfathered NAV but lesser than Purchased NAV, there's capital loss, being the difference between Switched and Purchased NAV.
c) If Switched NAV is lesser than Grandfathered NAV, but higher than Purchased NAV, there's capital gain, being the difference between Switched and Purchased NAV.
d) If Switched NAV is higher than Grandfathered NAV as well as Purchased NAV, there's capital gain, being the difference between Switched and Grandfathered NAV.
e) If Switched NAV is higher than Grandfathered NAV but lesser than Purchased NAV, there's capital loss, being the difference between Switched and Purchased NAV.
15. However, the net STCG earned during the year will be taxed at 15%.
16. As there's only 5% LTCG-STCG tax difference, you can switch before 1 year too, if there is windfall STCG in your Regular Option, despite 1% exit load, as there's no upper limit on STCG, which can be set off against STCL incurred during the year elsewhere too, while carrying forward the remaining STCL for the next 8 years, hence nil tax liability.
16. As there's only 5% LTCG-STCG tax difference, you can switch before 1 year too, if there is windfall STCG in your Regular Option, despite 1% exit load, as there's no upper limit on STCG, which can be set off against STCL incurred during the year elsewhere too, while carrying forward the remaining STCL for the next 8 years, hence nil tax liability.
17. LTCG can be used to set off both LTCL and STCL, but STCG can be used to set off only STCL during the financial year, after which the balance LTCL and STCL can be carried forward up to 8 assessment years for further set offs.
As Napoleon once said, "Nothing is impossible" ! :-) Happy Switching !