{"id":256,"date":"2018-09-29T17:00:54","date_gmt":"2018-09-29T11:30:54","guid":{"rendered":"https:\/\/srinivesh.in\/blog\/?p=256"},"modified":"2019-01-04T14:46:14","modified_gmt":"2019-01-04T09:16:14","slug":"switching-from-regular-to-direct-mind-the-tax","status":"publish","type":"post","link":"https:\/\/srinivesh.in\/blog\/switching-from-regular-to-direct-mind-the-tax\/","title":{"rendered":"Switching from Regular to Direct &#8211; Mind the tax"},"content":{"rendered":"<p><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">Direct plans have been a part of the Indian mutual fund industry from Jan 1, 2013. It won&#8217;t be wrong to expect that all those who wanted to switch from regular plans to direct plans would have done so. Interestingly, a recent question in Quora indicated that people are still considering the big switch. In this short article we look at the ways to do the switch with the optimal tax outcome.<\/span><\/p>\n<h2><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">First things first<\/span><\/h2>\n<p><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">While a lot of arguments are made for regular plans, it is quite clear that paying for mutual funds advice and then investing in direct plans is advantageous to the investor. You can read more here: <a href=\"https:\/\/srinivesh.in\/blog\/mf\/133\">Regular Funds \u2013 Pay more for \u2018free\u2019 advice<\/a><\/span><\/p>\n<ul>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">First decide how you are going to make future direct plan investments. Please note that I did not mention which funds; I mentioned the choice of online\/offline platform that you would use.<\/span><\/li>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">Set up your account on the portal. If you use SIPs, start the SIPs in direct plans. Even if you plan to use a different online portal, it would be very helpful to set up the account with MF Utility. You can read this article for the procedure to get this done. <a href=\"https:\/\/freefincal.com\/mf-utility-account-apply-online\/\" target=\"_blank\" rel=\"noopener\">How To Apply Online For a MF Utility Account<\/a><\/span><\/li>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">Now go and stop the current SIPs in regular plans. Typically the mechanism you used to invest earlier can be used to stop the SIPs. You may have to call your AMC if all else fails. Be prepared to do this using physical forms.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">The above procedures would take care of your future investments. We can then look at the current investments.<\/span><\/p>\n<h2><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">Simple options<\/span><\/h2>\n<p class=\"ui_qtext_para\"><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">While the switch seems like a single transaction, it is actually a redemption from the regular plan and re-investment in the direct plan. So exit loads and taxes would apply.<\/span><\/p>\n<p class=\"ui_qtext_para\"><span style=\"font-family: tahoma, arial, helvetica, sans-serif\"><em>Note<\/em>: <em>A switch from one equity to another equity can be made in one shot without any regard to the current market conditions<\/em>.<\/span><\/p>\n<ul>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">Avoiding exit loads is as simple as waiting for the time to elapse &#8211; usually a year for most equity funds. A lot of mutual funds also waive exit loads in case of a switch from regular to direct plan.<\/span><\/li>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">Till Apr 2018, mnimizing taxes was simple too. You just needed to wait till the units are a year old and then switch them..<\/span><\/li>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">If you have a small existing corpus, say less than 2 to 3 lacs, you can switch out the units after 1 year without much regard to the capital gains taxes. (The next section would explain why.)<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">Important features of LTCG on equity<\/span><\/h2>\n<ul>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">\u00a0The budget announcement on Feb 1, 2018 re-introduced long term capital gains on equity. A concession was made for the gains made till the previous day.\u00a0 Typically <em>capital gains =\u00a0 Selling price &#8211; costs involved in selling &#8211; costs involved in buying &#8211; &#8216;Buying Price&#8217;.<\/em>\u00a0 The grandfathering clause means that the &#8216;Buying price&#8217; can be the higher of the two: The actual purchase price or the value as om Jan 31, 2018. In short, the rules grandfather the gains made till Jan 31 2018.<br \/>\n<\/span><\/li>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">The rules also allow 1 lac LTCG per year without taxes. This has led to (good) advice for people to book this amount of capital gains every year.\u00a0 That is, even if you plan to hold a particular fund for five years, sell enough units to result in 1 lac of capital gains, and buy the units again. You would reset the purchase price to a higher value.\u00a0 There is a chance that the fund\/stock can rocket up in the short gap between redemption and re-purchase, but this is a very small chance.<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">Tax efficient ways to switch from regular to direct<\/span><\/h2>\n<ul>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">If your funds are doing better than the value as of Jan 31, 2018, do enough switches to use up the 1 lac per year allowance.<\/span><\/li>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">If your funds are near the Jan 31 values (or even slightly below) you can switch them out in one go.<br \/>\n<\/span><\/li>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">If your funds are well below the Jan 31 values, you may want to switch them and carry forward the capital losses, or adjust them against other capital gains.<\/span><\/li>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">If your corpus is quite large, say greater than 30 lacs, you may want to do the switch in one year so that you don&#8217;t miss out on the additional returns from direct funds. The trade-off will depend on three factors:<\/span>\n<ul>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">Your current corpus in regular plans<\/span><\/li>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">Your capital gains as of Jan 31, 2108<\/span><\/li>\n<li><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">Your funds&#8217; difference in returns between regular plans and direct plans<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><span style=\"font-family: tahoma, arial, helvetica, sans-serif\">Switching from regular plans to direct plans is a very important and beneficial step for investors. Just ensure that you do it in a tax-efficient way.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Direct plans have been a part of the Indian mutual fund industry from Jan 1, 2013. It won&#8217;t be wrong to expect that all those who wanted to switch from regular plans to direct plans would have done so. Interestingly, <a href=\"https:\/\/srinivesh.in\/blog\/switching-from-regular-to-direct-mind-the-tax\/\" class=\"more-link\">Read More<\/a><\/p>\n","protected":false},"author":4,"featured_media":258,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_themeisle_gutenberg_block_has_review":false,"footnotes":""},"categories":[6,8],"tags":[45],"class_list":["post-256","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mf","category-tax","tag-ltcg"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/posts\/256","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/comments?post=256"}],"version-history":[{"count":4,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/posts\/256\/revisions"}],"predecessor-version":[{"id":417,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/posts\/256\/revisions\/417"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/media\/258"}],"wp:attachment":[{"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/media?parent=256"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/categories?post=256"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/tags?post=256"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}