Capital gains when you switch between mutual funds

A "switch" sounds like a no-cost convenience — you're not paying yourself any money, just moving between schemes. But the Income Tax Act treats it as two separate transactions, each with tax consequences.

The switch-out (sale) leg

You're selling units of Fund A and the proceeds (at the prevailing NAV) are deemed received. This is a taxable event:

• Held > 12 months for equity / > 24 months for hybrid 35-65% / > 36 months for pre-April-2023 debt → LTCG.
• Below those thresholds → STCG.
• The applicable rate is the same as if you'd actually redeemed for cash.

The switch-in (purchase) leg

The proceeds buy Fund B units at its prevailing NAV. The 0.005% stamp duty is deducted from the gross amount before unit allotment, just like a fresh purchase.

Inter-scheme switches and STT

For equity-oriented mutual funds, Securities Transaction Tax (STT) is deducted at 0.001% on the switch-out (redemption) leg, the same as any equity-fund redemption.

Practical considerations

• Frequent switching can be costly even if individual switches don't move much money: stamp duty (one-way), STT (one-way for equity), and capital gains tax (one-way) all stack up.
• "Within-AMC" switches between two equity schemes don't get any tax concession — same rules as a different-AMC switch.
• Switches into ELSS create a fresh 3-year lock-in on the switched-in units.
• An STP (Systematic Transfer Plan) is a series of switches scheduled by the AMC — each instalment is its own taxable event.