about switching in mutual funds

Suppose one is investing in abcd fund in amc 1. now if one switches to some other fund after say 10 months or after 2 years within the same amc, then there is no tax? - there is tax as switching is considered as sale 
Is full amount needed for switch or is partial amount switching allowed too? - partial allowed
Can switch happen from equity to debt fund and vice versa? - yes 
The profit or loss, short term or long term, will not be shown in case of switching in ITR? - no it'll not shown correctly in AIS/ITR u have to get capital gain statement to know actual STCG/LTCG
Is there any possibility to switch from amc 1 to amc 2 to avoid tax? -  no bypassing tax is not possible, only way to avoid tax is stop switching unnecessary - harvest upto 1lac each year - stay invested for long long time

Switching shayad mf mai nhi hota, pehle sab sale hota hai phir purchase.

Any switching is equal to redemption so it is subject to Short or long term capital gain tax depending on the holding period. Partial amount can also be switched. Any category to any category of fund type is allowed, as long as company is allowing. Switching is between same company not different companies. You can generate CAMS statement for details on taxation.

-- NISM certified mutual fund distributor cum insurance advisor.

Jarvis.-. wrote:

Suppose one is investing in abcd fund in amc 1. now if one switches to some other fund after say 10 months or after 2 years within the same amc, then there is no tax? - there is tax as switching is considered as sale 
Is full amount needed for switch or is partial amount switching allowed too? - partial allowed
Can switch happen from equity to debt fund and vice versa? - yes 
The profit or loss, short term or long term, will not be shown in case of switching in ITR? - no it'll not shown correctly in AIS/ITR u have to get capital gain statement to know actual STCG/LTCG
Is there any possibility to switch from amc 1 to amc 2 to avoid tax? -  no bypassing tax is not possible, only way to avoid tax is stop switching unnecessary - harvest upto 1lac each year - stay invested for long long time

thanks. as switching is considered as sales so why do platforms highlight switching as an efficient tax reducing method? wrong info?
what exactly is the benefit of switching?
about harvesting of tax, if one is investing for a long period then does harvesting upto 1 lac if profit is there makes sense?

LordGane wrote:

Any switching is equal to redemption so it is subject to Short or long term capital gain tax depending on the holding period. Partial amount can also be switched. Any category to any category of fund type is allowed, as long as company is allowing. Switching is between same company not different companies. You can generate CAMS statement for details on taxation.

-- NISM certified mutual fund distributor cum insurance advisor.

thanks. as switching is considered as sales so why do platforms highlight switching as an efficient tax reducing method? wrong info?
what exactly is the benefit of switching?

please share ur views on this thread alsohttps://www.desidime.com/discussions/sector...ds

Switch = sell and then buy. Whichever scenario.

kukdookoo wrote:
thanks. as switching is considered as sales so why do platforms highlight switching as an efficient tax reducing method? wrong info?
what exactly is the benefit of switching?
about harvesting of tax, if one is investing for a long period then does harvesting upto 1 lac if profit is there makes sense?

i dont know why they promote it

switching helps moving from debt to equity over a period of ime or vice versa, suppose now i got 1 lakh rupees which i wanna invest in market but dont wanna buy at market price, i can invest 1 lakh in debt fund setup 12 switch to equity fund for next 12 month and forget about it 

harvesting means free 10k money every year for small income person/small portfolio this makes sense but after a level 10k saving a year doesn't matters

Jarvis.-. wrote:
i dont know why they promote it

switching helps moving from debt to equity over a period of ime or vice versa, suppose now i got 1 lakh rupees which i wanna invest in market but dont wanna buy at market price, i can invest 1 lakh in debt fund setup 12 switch to equity fund for next 12 month and forget about it 

harvesting means free 10k money every year for small income person/small portfolio this makes sense but after a level 10k saving a year doesn't matters

thanks. paji did not understand the 10k saving part.

kukdookoo wrote:
thanks. paji did not understand the 10k saving part.

let's say u invest 10L 

1st yr gain 1L

2nd yr gain 2L

3rd yr gain 1.5L

u directly redeemed after 3yr so capital gain is 4.5L

tax on it 35k

now u harvest the gains each year 

1st yr gain 1L tax 0

2nd yr gain 2L tax 10k

3rd yr gain 1.5L tax 5k

tax saving 20k i.e. 10k tax save per yr 

for 3rd yr u didn't saved anything as in both cases u'll get the 1st 1L tax exempted benefit 

Jarvis.-. wrote:

let's say u invest 10L 

1st yr gain 1L

2nd yr gain 2L

3rd yr gain 1.5L

u directly redeemed after 3yr so capital gain is 4.5L

tax on it 35k

now u harvest the gains each year 

1st yr gain 1L tax 0

2nd yr gain 2L tax 10k

3rd yr gain 1.5L tax 5k

tax saving 20k i.e. 10k tax save per yr 

for 3rd yr u didn't saved anything as in both cases u'll get the 1st 1L tax exempted benefit 

now u harvest the gains each year
1st yr gain 1L tax 0

2nd yr gain 2L tax 10k

3rd yr gain 1.5L tax 5k

tax saving 20k i.e. 10k tax save per yr
for 3rd yr u didn't saved anything as in both cases u'll get the 1st 1L tax exempted benefit

last two years tax= 10+5= 15k. how come you mentioned 20k?

about tax harvesting, should that be regularly done in bull and bear market or only when and if there is profit of 1lac+? + @LordGane @guest_999

Jarvis.-. wrote:

let's say u invest 10L 

1st yr gain 1L

2nd yr gain 2L

3rd yr gain 1.5L

u directly redeemed after 3yr so capital gain is 4.5L

tax on it 35k

now u harvest the gains each year 

1st yr gain 1L tax 0

2nd yr gain 2L tax 10k

3rd yr gain 1.5L tax 5k

tax saving 20k i.e. 10k tax save per yr 

for 3rd yr u didn't saved anything as in both cases u'll get the 1st 1L tax exempted benefit 

But anyway 1L just for harvesting if we take out, we have to put in

How that will be beneficial?

kukdookoo wrote:

now u harvest the gains each year
1st yr gain 1L tax 0

2nd yr gain 2L tax 10k

3rd yr gain 1.5L tax 5k

tax saving 20k i.e. 10k tax save per yr
for 3rd yr u didn't saved anything as in both cases u'll get the 1st 1L tax exempted benefit

last two years tax= 10+5= 15k. how come you mentioned 20k?

about tax harvesting, should that be regularly done in bull and bear market or only when and if there is profit of 1lac+? + @LordGane @guest_999

1st case tax was 35k

2nd case tax is 15k 

so saving 20k

harvesting is completed topic some harvest only gains some harvest losses also so they can setup with other incomes than mf

kukdookoo wrote:

now u harvest the gains each year
1st yr gain 1L tax 0

2nd yr gain 2L tax 10k

3rd yr gain 1.5L tax 5k

tax saving 20k i.e. 10k tax save per yr
for 3rd yr u didn't saved anything as in both cases u'll get the 1st 1L tax exempted benefit

last two years tax= 10+5= 15k. how come you mentioned 20k?

about tax harvesting, should that be regularly done in bull and bear market or only when and if there is profit of 1lac+? + @LordGane @guest_999

If your investment is 1 lakh and profit is 25k then total amount is 1.25 lakh. If you redeem gains your total amount is still 1.25 lakh so what's the point of redeeming? That makes sense if you have ELSS and you want to rotate money by redeeming gains and investing in ELSS without additional investment else it is just a zero sum game.

Redemption can be done if you want to move to a different asset class. Bull and bear phase are hard to predict. You would know it in hindsight only or by luck can get right. People lose more money by a bad selection of stocks/funds not by taxations. Better to stop investment in equity and focus on debt if one thinks we are in the bear phase. That's just my opinion.

LordGane wrote:
If your investment is 1 lakh and profit is 25k then total amount is 1.25 lakh. If you redeem gains your total amount is still 1.25 lakh so what's the point of redeeming? That makes sense if you have ELSS and you want to rotate money by redeeming gains and investing in ELSS without additional investment else it is just a zero sum game.

Redemption can be done if you want to move to a different asset class. Bull and bear phase are hard to predict. You would know it in hindsight only or by luck can get right. People lose more money by a bad selection of stocks/funds not by taxations. Better to stop investment in equity and focus on debt if one thinks we are in the bear phase. That's just my opinion.

Tax harvesting is just what the name suggests, saving future tax liability.

Tax harvesting makes sense when you continuously keep investing. If we consider your example of 100000 lakh and 25000 gains. That's a whooping 25% p.a. Say this fund returns 25% each year, in four years you will have a fund value of 244000+ rupees. That's a 144000 capital gain.

If you were to redeem the units after four years, you'd have to pay 14400 + cess as tax.

Had you done tax harvesting every year(if had invested heavily or regularly) you would have no tax liability. everytime you redeemed your units, your gains would have become capital 

Besides this exception may not be available when you need them. Like how indexation benefit was removed for debt funds. Few years ago no capital gains on equity was taxed. So 1 lakh expection may get axed in the upcoming budgets

Demon_slayer wrote:

Tax harvesting is just what the name suggests, saving future tax liability.

Tax harvesting makes sense when you continuously keep investing. If we consider your example of 100000 lakh and 25000 gains. That's a whooping 25% p.a. Say this fund returns 25% each year, in four years you will have a fund value of 244000+ rupees. That's a 144000 capital gain.

If you were to redeem the units after four years, you'd have to pay 14400 + cess as tax.

Had you done tax harvesting every year(if had invested heavily or regularly) you would have no tax liability. everytime you redeemed your units, your gains would have become capital 

Besides this exception may not be available when you need them. Like how indexation benefit was removed for debt funds. Few years ago no capital gains on equity was taxed. So 1 lakh expection may get axed in the upcoming budgets

But if the investment is for long term, say 8-10 years and one does not need money right now then does it make some to redeem, using indexation, and then reinvest the same amount at a higher nav in the same fund? It will just cause the average nav to rise.

I am not an expert at tax harvesting but As far as I understand, it is done the same day. You are supposed to make a redemption request first and the place a new order the same day. (To mitigate the effects of Nav price movements).

This raises the two questions in mind. 1. Does this mean one has to have funds extra as much as the redemption request to place the order?

I think so.

2. Even if you do, will that cancel out each other like an intraday trade in stocks?

This is the tricky part. As I've noticed lately, even when you place an order using upi(instant payment should be allotted units per the nav of the payment date) the fund house usually allots units per the nav of next day or the day after that. So, your trade will not be considered an intraday trade and you will lose out on the nav a day or two. But that shouldn't be a problem in the long run if nav doesn't oscillate much.

If anyone has any ideas or clarification on this, most welcome to correct my assumptions.

kukdookoo wrote:
But if the investment is for long term, say 8-10 years and one does not need money right now then does it make some to redeem, using indexation, and then reinvest the same amount at a higher nav in the same fund? It will just cause the average nav to rise.

If I'm understanding your point correctly, there is no indexation benefit anymore for debt funds bought after March 2023. It is still available for units bought before that. But Tax harvesting is for equity funds/stocks though and Equity doesn't have any indexation benefit.

Tax harvesting should be Ideally done, when your investments are performing exceptionally well. You don't have to wait until March to do it. Most people would wait until March theoretically to get maximum benefit (and do last minute tax planning), if large amounts were go in and out of funds then yes, this might upset nav movements.

But you have to consider the fact, most people don't understand tax harvesting. even those who do, might not have much gains to do it. If someone has only a couple of thousands as gains, they might not be motivated to go through the hassle of selling and buying their units back. 

Again tax harvesting makes sense for only those who have a lot of gains and or make regular/heavy investments.

Demon_slayer wrote:

If I'm understanding your point correctly, there is no indexation benefit anymore for debt funds bought after March 2023. It is still available for units bought before that. But Tax harvesting is for equity funds/stocks though and Equity doesn't have any indexation benefit.

Tax harvesting should be Ideally done, when your investments are performing exceptionally well. You don't have to wait until March to do it. Most people would wait until March theoretically to get maximum benefit (and do last minute tax planning), if large amounts were go in and out of funds then yes, this might upset nav movements.

But you have to consider the fact, most people don't understand tax harvesting. even those who do, might not have much gains to do it. If someone has only a couple of thousands as gains, they might not be motivated to go through the hassle of selling and buying their units back. 

Again tax harvesting makes sense for only those who have a lot of gains and or make regular/heavy investments.

But Tax harvesting is for equity funds/stocks though and Equity doesn't have any indexation benefit.

Are you sure that equity funds don't have any indexation benefits?

here is the question again, if the investment is for long term, say 8-10 years and one does not need money right now then does it make some to redeem, using indexation,and then reinvest the same amount at a higher nav in the same fund? It will just cause the average nav to rise.

tagging @LordGane and @Jarvis.-. too

I have been investing in mutual funds for a long time now. Every year I redeem partial amount in some fund to release profit of 1 lac and put in the released amount again in same mutual fund in couple of days. Yes, it does make average NAV to move up but in absolute terms it does not make any difference and you just saved tax of 10k.

kukdookoo wrote:

But Tax harvesting is for equity funds/stocks though and Equity doesn't have any indexation benefit.

Are you sure that equity funds don't have any indexation benefits?

here is the question again, if the investment is for long term, say 8-10 years and one does not need money right now then does it make some to redeem, using indexation,and then reinvest the same amount at a higher nav in the same fund? It will just cause the average nav to rise.

tagging @LordGane and @Jarvis.-. too

"Are you sure that equity funds don't have any indexation benefits?"

Yes, equity funds don't have any indexation benefit. Capital gains are tax free upto 1 lac. Anything more is taxed at a flat rate of 10% + cess for long term gains.

"here is the question again, if the investment is for long term, say 8-10 years and one does not need money right now then does it make some SENSE? to redeem, using indexation no indexation and then reinvest the same amount at a higher nav in the same fund? It will just cause the average nav to rise".

Yes, even if you don't need the money, tax harvesting is beneficial.

Say you have invested 10lacs In a fund and it has returned @ 10%, 1 lac gains after a year. If you redeem the whole 11 lacs and reinvest it, the gains(1 lac) will not be taxed and becomes your capital. If this 11 lacs returns another 1.1 lacs next year, you can redeem units worth 12 lacs next year and not be taxed at all and so on.

But if you didn't redeem it the first year,  you will have 2.1 lacs gains after two years. If you need to redeem the whole amount suddenly, you can only get tax exemption for 1 lac. The rest 1.1 will be taxed at 10%, you will have to pay 11k + cess.

This is the benefit of tax harvesting.

Even if you wait a couple of days for the funds to reach you , you will lose nav movements for those days but in the long run, this doesn't make much difference.

If You redeem in the afternoon and place the buy order next morning you might be able to get the same nav or atleast that days nav.

What platform do you use or planning to invest? And how much are planning to invest?

kukdookoo wrote:
Are you sure that equity funds don't have any indexation benefits?

Sorry to butt in.

@Demon_slayer

Funds having equity exposure between 35% and 65% can continue to get indexation benefits if the holding period is over 36 months. Certain fund houses have launched (and are launching) multi asset funds to benefit from this tax arbitrage.  

Ramta_Jogi wrote:

Sorry to butt in.

@Demon_slayer

Funds having equity exposure between 35% and 65% can continue to get indexation benefits if the holding period is over 36 months. Certain fund houses have launched (and are launching) multi asset funds to benefit from this tax arbitrage.  

I don't have any knowledge about this. Tell us more, last I heard, debt funds have been stripped of indexation benefits. Thanks in advance.

Demon_slayer wrote:

I don't have any knowledge about this. Tell us more, last I heard, debt funds have been stripped of indexation benefits. Thanks in advance.

If a fund has equity allocation between 35-65%, it still qualifies for indexation benefit. Balanced hybrid funds come under that category. 

Only one fund at present offers this benefit - the recently launched 360 One (formerly IIFL) Balanced Hybrid Fund. Equity allocation  usually fluctuates between 40 and 60 per cent. 

Multi asset funds may also offer such benefit as per their equity allocation. The SID of the fund would have such information 

Ramta_Jogi wrote:

If a fund has equity allocation between 35-65%, it still qualifies for indexation benefit. Balanced hybrid funds come under that category. 

Only one fund at present offers this benefit - the recently launched 360 One (formerly IIFL) Balanced Hybrid Fund. Equity allocation  usually fluctuates between 40 and 60 per cent. 

Multi asset funds may also offer such benefit as per their equity allocation. The SID of the fund would have such information 

They would be treated as debt funds for the purpose of taxation right? You have to wait three years for indexation to kick in. Thank for the info man.