I have invested in Mutual Fund (MF) schemes of ICICI Prudential MF, HDFC MF, SBI MF, Kotak MF. I have invested in regular plans of all funds. I have around Rs. MF investment worth 85 lakhs. I am currently retired and get interest income of Rs. 2-3 lakhs.
Can you please suggest various ways by which I can convert my funds from regular to direct scheme and reduce my tax liability?
-Name withheld on request
Switching from regular to direct plan of mutual fund will be treated as redemption from one scheme and fresh investment in another, even if you switch to the same fund. This transaction of yours will attract capital gains tax. Before starting the switch, you should evaluate the capital gains as you currently have around Rs 85 lakh in your mutual fund portfolio and these would have been invested in different periods.
Depending on the holding period, the capital gains for these investments will vary. Gains on investments made before 31st January 2018 are exempt from tax. Hence, you can continue with these investments in a regular plan as reinvesting them in the present will yield benefits from the new investments whenever you redeem them in the future.
For other investments, you may consider switching over a period of time instead of switching all at once. Long-term capital gains of Rs 100,000 in Equity Mutual Funds are tax-free every year, you can take advantage of this clause and switch in a staggered manner. Since your interest income is around Rs 2-3 lakh, you can also claim deduction under section 80TTB, where interest income of Rs 50,000 is tax-free. This will also help you increase your switch amount.
You can utilize the limit of Rs 150,000 under 80C by reinvesting the redeemed funds in good ELSS (Equity Linked Savings Schemes) direct schemes, which are like equity diversified funds. This can save tax on gains of Rs 1,50,000 as well as help you reinvest in direct schemes as well.
I suggest you evaluate the pros and cons of switching from a regular plan to a direct scheme from all perspectives as the money reinvested in direct funds will also be liable for capital gains whenever you redeem. The capital gains for these investments will be based on the NAV of your direct plan.
Harshad Chetanwala is the co-founder of MyWealthGrowth.com