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Tax implications while switching from regular to direct plans

In the case of equity funds, the differential between direct and regular plans is around 1 per cent, informs Ashutosh Gupta

VR Premium advises switching from regular to direct plans. But doing so may attract large amounts of tax, thereby making it unprofitable. What should one do?
- Sumant Sethi

You need to understand that you are anyways incurring a big cost in terms of the additional expense ratio, which you are incurring on regular plans. For example, in the case of equity, this differential tends to be around 1 per cent per annum. So, in the case of a Rs 1 crore portfolio, you will end up paying Rs 1 lakh extra in any case. However, the idea is to shift from regular plans to direct plans over a period of time, instead of at one go. Especially, if you are sitting at sizeable accumulated capital gains, stagger it over a period of time.

The capital gains up till January 31, 2018 are anyways grandfathered. You can get all the details related to capital gains after factoring in the grandfathering from your premium account itself. So, compare these capital gains with the kind of extra cost that you are incurring over regular plans. That itself should give you a nudge for moving to direct plans.

And as I said, don't be in a hurry. Do it gradually over a period of time. We are near to the closing of this financial year. So, split your switch between these two financial years so that you can benefit from the Rs 1 lakh exemption on capital gains in two years.

Also, look for opportunities in the form of a sharp correction in the market to make these shifts. Whenever the market falls, some of these capital gains erode. That itself can be an opportune time to make some of these shifts.

So, the broad point is through our communication and what all you see in your premium account, we will continue to provide you with that nudge and continue to remind you that you should make this switch. But it doesn't mean that you will have to do it in one day. Take your time, plan it in a more methodical way and then do it. But if you don't do it, over a long period of time, say 15-20 years, the additional cost that you incur on regular plans can be a far greater burden than the burden of the capital gains' tax liability.

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