Capital gains on equity mutual funds

1. The change of option does not amount to transfer as it does not fall within the ambit of section 2(47).

2. The original date of acquistion of the units would be considered as the relevant date for the purpose of capital gains

Taxing withdrawals

Switching from one option to another, even if it is within the same scheme, is deemed like withdrawing money from one scheme and putting into another. Though such a switch can easily be done, when you withdraw from, say, a dividend plan and switch to a growth plan, you are deemed to have withdrawn from a scheme. This withdrawal attracts long-term capital gains or short-term capital gains, depending on the tenor that you had stayed invested in the first option.

The reason for this is that both the dividend and growth plans have different net asset value (NAV). Typically, a dividend plan’s NAV is lower than that of the growth plan because the dividend plan would have declared dividends regularly; dividend declarations come out of the scheme’s pocket and thus the NAV drops. A switch between a dividend and growth option—even if done within the same scheme—is deemed a financial transaction. Hence, it will attract capital gains tax.

Dividend reinvestment to dividend payout and vice-versa

However, you can seamlessly switch between dividend reinvestment and dividend payout options. The reason being, “payout” and “reinvestment” are sub-options within the dividend option. So when you are moving within the dividend option—treat this as an umbrella option—you are not really moving out of the option; you are just choosing what to do with your dividend; whether you want it in your hands or you want to reinvest it in the scheme. Remember: when you opt for a dividend reinvestment and later wish to switch to the growth option, each dividend that was reinvested earlier is treated like a fresh purchase. So when you switch to the growth option, those reinvested dividends will attract capital gains tax.