How to change from common to direct MFs with tax effectivity

I’ve invested in mutual fund (MF) schemes of ICICI Prudential MF, HDFC MF, SBI MF, Kotak MF, amongst others. I’ve invested within the common plan of all funds. I’ve round Rs. 85 lakh value of MF investments. I’m presently retired and obtain an curiosity earnings of Rs. 2-3 lakhs. 

Can you please recommend varied methods through which I can change my funds from common to direct plan and reduce my tax legal responsibility?

 -Name withheld on request

The switching of mutual  funds from common to direct plan will likely be thought of as redemption from one scheme and recent funding within the different, even when you change throughout the similar fund. This transaction of yours will entice capital features tax. You should consider the capital features earlier than initiating the change as at current you’ve got near Rs.85 lakh in your mutual fund portfolio and these would have been invested throughout completely different interval.

Depending on the holding interval, the capital features for these investments would differ. The features on investments finished earlier than 31 January 2018 are exempt from tax. Hence, it’s possible you’ll let these investments proceed within the common plan as reinvesting them at current will make features from the brand new funding taxable everytime you redeem them in future.

For different investments, you may contemplate switching over a interval as an alternative of doing all of the switches in a single go. Long-term capital features of Rs.100,000 in fairness mutual funds are tax-free yearly, it’s also possible to benefit from this clause to change in a staggered method. As your curiosity earnings is round Rs.2–3 Lakhs, it’s also possible to declare a deduction beneath part 80TTB the place the curiosity earnings of Rs.50,000 is tax-free. This will allow you to to extend your change quantity as effectively.

You also can use the restrict of Rs.150,000 u/s 80C by reinvesting the redeemed funds in direct plans of excellent ELSS (fairness linked financial savings scheme) that are identical to fairness diversified funds. This can save tax on the features of Rs.1,50,000 and on the similar time allow you to reinvest in direct plans as effectively. 

I might recommend you consider the professionals and cons of switching from a daily plan to a direct plan from all views because the reinvested cash in direct funds may also be liable to capital features everytime you redeem. The capital features for these investments will likely be based mostly on the NAV of your direct plan.

Harshad Chetanwala is co-founder at MyWealthGrowth.com

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