Mutual Fund

Mutual fund: Income tax rules on switching to another plan of same scheme

If I switch some amount from my existing tax saving scheme to same tax saving scheme of the same fund house but different option i.e. from dividend payout to growth option, can I claim tax benefit in respect of the shifted amount? My taxable income is below 5 lakh including profits on ELSS investment being switched.

Equity Linked Saving Schemes (ELSS) are basically equity oriented schemes on which an Individual and HUF can claim deduction under Section 80 C up to Rs. 1.50 lakh along with other eligible items during the year. For the purpose of income tax, switching from one plan/option to another plan/option of the same scheme or another scheme is treated as transfer giving rise to tax liability on profits made. 

ELSS have a lock in period of three years so you would be allowed to switch from the tax saving schemes only after three years and therefore the profits made on the original investment will be treated as long term capital gains. Such long term capital gains on switched ELSS will get taxed at concessional rate of 10% after initial one lakh on which no tax is payable. The initial one lakh on which no tax is payable will include long term capital gains from all listed shares and all equity oriented schemes taken together.

The investment made by you in the other option of the same scheme by switching the old ELSS into new ELSS scheme will be eligible for tax benefits under Section 80 C as this is treated as fresh investment. 

Since your total income does not exceed Rs. 5 lakh including long term capital gains on ELSS you are eligible to claim rebate under Section 87A. In case your long term capital gains on all listed equity shares and equity oriented mutual fund schemes including long term capital gains on ELSS does not exceed one lakh rupees you do not have to pay any tax. However, in case such long term capital gains exceed one lakh, you will have to pay tax at 10% on the excess over one lakh while availing rebate under Section 87A against tax liability on other income. 

Balwant Jain is a tax and investment expert and can be reached on jainabalwant@ and @jainbalwant on Twitter

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