Switching in mutual funds means moving money from one scheme to the other. Switching requires selling of units from one scheme and investing the proceeds in another. It can be done within the same Fund House or across Fund Houses as well.
While switching from equity funds before completion of one year of investing, there will be a Short Term Capital Gain (STCG) tax at 15%. After one year, the rate is 10%, beyond total equity gains of INR 1,00,000.
Switching from debt funds: If switching happens before 36 months, the profit gets added to the income and is taxed as per slab rate. For 36 months and more, the Long Term Capital Gain rate will be 20% with indexation.
For carefully selected mutual funds, short term underperformance should not be an issue. Switching to an outperforming fund should not be the default option. However, if the existing fund has been consistently underperforming, switching to a better performing fund will be a good idea. The Lock-in and Exit load should be considered before a switching decision.
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