Please let me know if it is possible to switch from dividend pay out to growth option in an existing mutual fund?
- RKM
Yes, it is possible to switch from dividend to growth option in an existing mutual fund. However, a switch is treated as a redemption in one scheme and a fresh purchase in another scheme.
That means you will be liable to pay an exit load if you are exiting the scheme so soon. Similarly, you may also pay short-term capital gains tax. Many mutual funds change an exit load of 1 per cent on exits before a year. If equity investments are sold before a year, it attracts short-term capital gains tax of 15 per cent. Debt funds sold before three years also would attract short-term capital gains tax. In such cases, short-term gains are added to the income and taxed as per the Income Tax slab applicable to the investor. Equity investments qualify for long-term capital gains tax of zero if the investments are held for more than a year. Debt investments qualify for long-term capital gains tax of 20 per cent with indexation benefit only if it is sold after three years.
If you want to avoid paying both exit load and short-term capital gains tax, you can opt for an easy way out. Just stop the investment in the dividend option and start directing your new investments to the growth option. Wait for the debt option to qualify for zero exit load and long term-capital gains taxes to make the switch.
This article was originally published on December 22, 2015.
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