I invested Rs 1 lakh in HDFC Equity (Growth) in July 2003. This has yielded absolute returns of 44 per cent till date. I propose to switch the entire amount into HDFC Prudence Fund (Growth) now and plan to stay in this balanced fund for over an year. Will the profit made on HDFC Equity Fund attract short-term capital gains for the present year? Since I am not withdrawing the amount for over a year, how will this gain be viewed for taxation? Further, is exit/entry load applicable on switching?
T. N. Shankar
Any switch from one fund to another within one year is liable to short-term capital gains tax. From the tax angle, all switches are considered as if you are redeeming the investment from the fund and a fresh investment is made in a new scheme.
So, after switching, it doesn't matter how long you stay with the new fund, as it is not the combined holding period, but the holding period in each fund that is considered for tax purpose. If you switch from HDFC Equity to HDFC Prudence at this stage, you will pay short-term capital gains tax on your profit in HDFC Equity. The taxable short-term gain is clubbed with taxable income from other income classes and is taxed at the overall tax rate applicable to the person.
However, if you stay invested in HDFC Equity till July 2004 (for one year), your gains will be treated as long-term capital gains and you would be taxed at a rate of 10 per cent (without indexation). Now, as far as the entry/exit load is concerned, HDFC charges a difference in entry load for switches between its equity and balanced funds. In your case, as both HDFC Equity and HDFC Prudence charge a similar entry load of 2 per cent, you won't have to pay any additional load here.
This article was originally published on December 23, 2003.
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