Does STP within same AMC attract capital gains tax?

If I transfer my investment from an ELSS fund to an equity-oriented fund within the same AMC through a systematic transfer plan (STP), will it attract long-term capital gains (LTCG) tax? - Sreekanth N V

Yes, switching from an equity-linked savings scheme (ELSS) to another equity-oriented fund via STP (systematic transfer plan) will trigger LTCG tax, even if both funds belong to the same asset management company (AMC).

A systematic transfer plan allows investors to move funds from one mutual fund to another in a phased manner without the money passing through their bank account. However, from a tax perspective, each transfer is considered a withdrawal (redemption) from the source fund (ELSS in this case) and a fresh investment in the target fund.

Since ELSS funds have a mandatory three-year lock-in, only units that have completed this period can be transferred via STP. On withdrawal, LTCG tax applies on gains exceeding Rs 1.25 lakh in a financial year, at the rate of 12.5 per cent.

Key considerations before opting for STP

Before initiating an STP, consider these factors:

• Tax efficiency: If minimising tax liability is your priority, consider staggering your withdrawals across multiple financial years to utilise the annual Rs 1.25 lakh tax-free LTCG threshold effectively.
• Investment alignment: Ensure the target equity fund aligns with your current risk profile, investment horizon and financial goals before making the switch.

Remember that while an STP offers convenience in transitioning between funds, it does not provide any special tax advantages compared to a regular redemption followed by reinvestment.

Also read: Can a mid-cap fund offer enough large-cap exposure?

This article was originally published on March 03, 2025.