Mutual Funds: Income Tax Rules on Switching to Another Plan of the Same Plan

Equity Linked Savings Schemes (ELSS) are basically equity oriented schemes on which an individual and HUF can claim deduction under section 80C up to Rs. 1.50 lakh along with other eligible items during the year. For the purpose of income tax, change from one scheme/option to another scheme/option of the same scheme or any other scheme is treated as transfer, thereby increasing the tax liability on the profit made.

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

The investment made by you in another option of the same scheme by converting the old ELSS to a new ELSS scheme will be eligible for tax benefits under section 80C as it is considered as a fresh investment.

Since your total income does not exceed Rs. You are eligible to claim exemption under section 87A including long term capital gains on 5 lakh ELSS. If your long-term capital gains on equity oriented mutual fund schemes including long-term capital gains on all listed equity shares and ELSS do not exceed Rs.1 lakh, you will not have to pay any tax. However, if such long-term capital gains exceed one lakh, you will have to pay 10% tax on more than one lakh, availing exemption under section 87A against tax liability on other income.

Balwant Jain is a tax and investment specialist and can be contacted on Twitter at jainbalwant@gmail.com and @jainbalwant.