Switching between mutual funds

[siva0]

Switch between two mutual of same AMC : this option is not available in zerodha …

It is available on ICICI direct , if I switch then it treated as LTCG /STCG ?

Kindly suggest if I want to use the existing mutual funds as collateral which are not eligible for cash collateral.

1. should I switch in ICICI direct and then transfer to coin ?

2. should I transfer without switching considering LTCG / STCG only ?

[Prayag]

@siva0

if I switch then it treated as LTCG /STCG

As mentioned on this website, the type of capital gains will depend on the duration for which the mutual fund is held for -

Once you invest in a Mutual Fund scheme, any change you wish to make in terms of changing plans (Regular/Direct), options (Growth/Dividend) or changing schemes within the same fund house will be considered as a sale (redemption). Hence making any such change is possible but like redemption, these changes will attract exit load and capital gains tax depending on how long you have been invested.

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Other than that, the type of capital gains also varies based on the nature of the mutual fund (aka debt or equity). This thread talks about that in more detail for debt mutual funds -

@San78

Debt mutual funds are taxed as follows:

AA] If it is held for more than 36 months - it will be treated as Long Term. Long Term Capital Gains on debt fund are taxed @ 20% after indexation.

BB] If it held for less than 36 months - it will be treated as Short Term. Short Term Capital Gains are taxable as per the applicable slab rates.

Further, indexation is a method to determine the correct value of the asset after including the effect of inflation. This is done with Cost Inflation Index (https://www.incometaxindia.gov.in/Charts%20%20Tables/Cost-Inflation-Index.htm) laid by the Income Tax Department.

Example : If debt mutual fund was bought in April 2016 Rs 100; and you have sold it when the value is Rs 180 in Dec 2020. The holding period is more than 36 months.

Cost Inflation Index FY 2016-17 = 264
Cost Inflation Index FY 2020-21 = 301

Going by absolute values - the gain is Rs 80. However, when inflation is factored; the cost will be
114 (100/264*301) and gain works out to Rs 66.

And you need to pay 20% tax on Rs 66.

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For equity mutual funds, this concept is explained in detail in this blog post by @Quicko -

Equity Mutual Funds – Since these mutual funds invest in equity-oriented instruments, the treatment is the same as equity shares.

• Long Term Capital Gain (LTCG): Any gain arising on the sale of equity mutual fund held for more than 12 months is considered as Long Term Capital Gain i.e. LTCG on mutual funds.

• Short Term Capital Gain (STCG): Any gain arising on the sale of equity mutual fund held for less than 12 months is considered as Short Term Capital Gain i.e. STCG on mutual funds.

If you are interested, the Taxation for Investors chapter on Varsity explains these concepts in much more details (including how mutuals funds are categorized into equity or debt category)

[siva0]

@Prayag thanks for your kind reply …

your reply helped my in understanding the taxation part as well as underlying mechanism in switching .

Thanks alot

[Chirag1]

@Prayag Why cant switch of MF be achieved or what is the challenge ? ( Switch within same AMC )

Redeem, wait, then get proceeds, then apply the next day.
Imagine the number of days it takes from an unpledge to a pledge cycle.