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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.

Benefits of Switching:

1. You just need to submit a duly filled and signed Transaction form for the same.

2. 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.

3. No need to fill-in a separate application form for the same.

4. A strategy that can capitalise the opportunity in Mutual Funds whenever the same arrives etc

Tax effect of Switching:

1. Tax effects of switching are mainly same as in the case of withdrawal 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.

2. Capital Gains/(Losses) are Taxed in the similar way as in the case of withdrawal from Mutual Fund scheme.

3. Same method is to be followed for computation of duration of investment.

Thus, while finalising 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….

CA Sahil Jolly
Jolly & Co. Chartered Accountants

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Category Income Tax, Other Articles by - Sahil Jolly