SEBI wants to make it easier for mutual fund investors to switch schemes without paying capital-gains tax. Wealth managers see merit in the idea. But they are less sure it will improve investing discipline.
SEBI has recommended that a switch from one mutual fund scheme to another should not be treated as a taxable sale if the investor has held the units for more than a year. The proposal was first reported by Reuters. It forms part of SEBI’s pre-Budget representations and is not binding.
Under current rules, selling units of an equity-oriented mutual fund to move into another scheme can trigger capital-gains tax. The money remains invested in the market, but the switch is treated as a redemption followed by a fresh purchase. For units held beyond 12 months, gains above Rs 1.25 lakh in a financial year are taxed at 12.5%. The rate was raised from 10% in July 2024.
The tax can delay a sensible decision. An investor may stay in an underperforming fund simply to avoid a large tax bill.
“There are instances where investors continue holding an underperforming scheme because they are averse to a significant tax liability,” said Deviprasad Nair, chief business officer at Helios India.