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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Taxation

Which of the following best describes the tax treatment of switching units from one scheme to another scheme of the same mutual fund?

A switch between two different schemes is treated as a redemption of the old units and a fresh purchase of new units. Capital gains or losses on the units switched out are computed and taxed according to the holding period and fund type.

  1. AIt is treated as redemption and fresh purchase, so capital gains may ariseCorrect
  2. BIt is not a transfer, so no capital gains arise
  3. CIt is taxed only as income from other sources
  4. DIt is taxed only when the new units are redeemed, and the old gain is ignored

Explanation

A switch from one scheme to another is a redemption of the original units and a fresh purchase in the new scheme. Capital gain or loss on the redeemed units is therefore computed and taxed as per holding period. Only a switch between plans or options within the same scheme may be treated differently.

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