Home / Money / Personal Finance /  I have converted my regular MFs to direct plans. What's the tax implication?
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I am an NRI and have converted my funds from regular to direct plans with same scheme and the same AMC. The AMC has already deducted TDS . Do I have to pay LTCG or STCG? Do I have to declare this while filing tax? What is the tax surcharge which was deducted along with TDS? 

- Vicky R.

(Query answered by Dr. Suresh Surana, founder, RSM India)

The switching of mutual funds from regular plan to direct plans is treated as exit from one plan and entry into another. Accordingly, this is treated as ‘transfer’ under Section 2(47) of the Income Tax Act, 1961 (hereinafter referred to as ‘the IT Act’) and is subject to capital gains tax. The capital gains tax rate applicable on such transaction will depend upon the period of holding of the funds. The period of holding would be determined based on the type of the units held by the NRI investor. In case of listed units of equity oriented fund, the gains would be considered as long term, if held for more than 12 months and accordingly subjected to tax @ 10% u/s 112A of the IT Act without the benefit of indexation. If the units are held for up to 12 months before the switch, the same would be considered as short term and the same would be subjected to tax @ 15% under Section 111A of the IT Act.

In case of the units being debt mutual fund units, the threshold period of 36 months will be made applicable and accordingly, any switch made after 36 months would attract long term capital gains tax @ 20% u/s 112 of the IT Act whereas switching when such units have been held up to 36 months would be taxed as short-term capital gains as per the applicable slab rates.

However, any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme mergers of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund would be exempt u/s 47(xviii) of the IT Act. Thus, only in case of the switch being on account of merger under the process of consolidation of the schemes of mutual fund in accordance with the SEBI, the same would be treated as exempt.

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