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Transaction Costs

Ashwin Mital wants to know about the tax liabilities & transaction costs of an MIP

I want to start a monthly SIP in a monthly income plan and then opt for a systematic transfer plan (STP) to an equity fund. Will I be liable to pay any tax on this transaction? Do MIPs also carry exit loads?
-Ashwin Mittal
A monthly income plan (MIP) is a debt-oriented mutual fund. The current tax laws say that capital gains from a debt oriented fund are clubbed with an individual's income and taxed as per the slab system. This is the case if the holding period is less than one year. Such a tax is termed as short-term capital gains tax or STCG tax. If the holding period is greater than one year, then the tax is 10 per cent of the capital gains without indexation or 20 per cent of the capital gains with the indexation benefit. This type of tax is called long-term capital gains tax LTCG tax. Indexation is the process of adjusting the purchase price of units for inflation.

Do note that this tax is to be paid by you while filing your income tax returns. The mutual fund would not deduct any tax at source when you transfer your money from a debt to an equity fund. Assuming that your holding period for the units of an MIP will be less than one year, your transaction will be subject to tax as per the slab system, if there are any capital gains on your MIP units.

Another cost that you will have to bear is that of loads. Most of the MIPs charge an exit load of anywhere between 0.5 to 1 per cent upon redemption within six months from the date of allotment.



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