How does switching mutual funds work, and is it taxed?

A switch moves your money from one scheme to another scheme of the same fund house, and the law treats it as a sale. The fund house sells your units in the first scheme and uses the money to buy units in the second. So a switch can be taxed, and it can carry the first scheme's exit load. An exit load is a fee some funds charge if you sell within a set time after buying. "A switch is not a sale, so there is no tax" is a mistake.

What happens when you switch mutual funds?

A switch is a sale of units in one scheme and a purchase of units in another, done as a single request. Under the Income-tax Act, 2025, a "transfer" includes "the sale, exchange or relinquishment of the asset". SEBI's master circular treats a "switch out" as a sale and a "switch in" as a purchase, with the switch-in amount equal to the switch-out payout.

The switch-out is the leg where your old units are sold. The switch-in is the leg where the proceeds buy units in the new scheme. The money does not come to your bank account in between.

The sale can create a gain or a loss on the old units. The new units start fresh: their holding period, the time you have owned them, begins on the switch date.

If you switch only part of your holding, the oldest units go first. In a demat account the Income-tax Act, 2025 applies first in, first out (section 67(7)(c)). For units held with the fund house, one flexi cap fund's scheme document says switch-outs are done on a first in, first out basis. Each lot keeps its own purchase date, cost and holding period.

A merger your fund house carries out is a different thing; see what to do in a mutual fund merger.

Can you switch to a fund from another fund house?

No. A switch moves money between schemes of the same fund house. To move to another fund house, you sell and then buy.

One scheme document lets investors switch "to any other Scheme offered by the Mutual Fund". SEBI describes a systematic transfer plan as moving money "to another scheme of the same Mutual Fund".

The sell-and-buy route has two steps. Koshex customers can redeem (sell) units on Koshex. SEBI requires the money to reach unitholders within 3 working days, or 5 for schemes with at least 80% in permitted overseas investments. You then buy the new fund at the NAV, the price of one unit, of the day your money reaches it.

How long does a switch take, and which NAV do you get?

Each leg gets its own NAV. The switch-out is priced like a sale, and the switch-in on the day the money reaches the new scheme. So the two can fall on different days.

The switch-out is priced like any sale. For schemes other than liquid and overnight funds, a request received up to 3:00 p.m. on a business day gets that day's NAV. A later request, or one on a non-business day, gets the next business day's NAV.

The switch-in is priced like a purchase. For these schemes, the switch-in gets the closing NAV of the day the money is available to the scheme. The money must reach the scheme's account by 3:00 p.m. One fund's scheme document adds that for a switch, the allocation of units follows the redemption payout.

So your money can sit out of the market for a stretch between the two legs. A tiny stamp duty is also deducted from the switch-in amount, so slightly fewer units are bought.

Liquid and overnight funds follow their own timings, listed in the cut-off timings article. The selling guide covers a normal sale.

Is switching mutual funds taxable?

Yes, the switch-out is a sale, so any gain on those units is taxed under the capital gains rules. The rules below are for tax year 2026-27 under the Income-tax Act, 2025 as amended by the Finance Act, 2026.

• Equity-oriented funds. These hold at least 65% of their money in shares of Indian listed companies, on the annual average. Gains on units held 12 months or less are short-term and taxed at 20%, where securities transaction tax (STT) is charged on the sale. Gains on units held longer are taxed at 12.5% on the part above ₹1,25,000 in the tax year, where STT is paid on the transfer. That ₹1,25,000 is one allowance per person per tax year, shared by all your qualifying shares and fund units.
• Debt funds that are Specified Mutual Funds. These put more than 65% of their money in debt and money market instruments. For units acquired on or after 1 April 2023, gains are short-term whatever the holding period, so they are taxed at your slab rate. Units bought before 1 April 2023 and held more than 24 months are long-term, taxed at 12.5%.
• Funds that are neither. A balanced hybrid fund, a gold fund of funds and a non-debt international fund of funds are not Specified Mutual Funds. Gains on units held 24 months or less are short-term and taxed at slab rates. Gains on units held longer are taxed at 12.5%. For hybrid, international and fund of funds schemes, the tax class depends on what the fund actually holds during the year, so check the latest documents or ask a tax adviser.

Health and Education Cess adds 4% to the tax. Surcharge applies only when total income is above ₹50 lakh. TDS is tax deducted before the money reaches you. None applies to a resident's redemption gains, so none is deducted on a resident's switch gain.

The switch resets the clock

The new units are bought on the switch date. Take Specified Mutual Fund units bought in 2022 and held more than 24 months. Their gains are long-term, at 12.5%. Switch them into another Specified Mutual Fund now, and the new units are bought after 1 April 2023. Any later gain on them is taxed at your slab rate, whatever the holding period. The switch gives up the older units' chance of long-term treatment.

What if the switch makes a loss?

A short-term capital loss can be set off against any capital gain that year. A long-term loss can be set off only against long-term gains. Neither can be set off against salary. An unabsorbed loss is carried forward for at most eight tax years, if the return was filed by the due date.

Worked example: switching units held 8 months

The NAVs here are assumptions. Meena holds 4,000 units of an equity-oriented scheme, bought at a NAV of ₹40, which cost her ₹1,60,000. On 15 September 2026, before 3 p.m. on a business day, she switches all of them to another scheme of the same fund house. The switch-out NAV is ₹50, so ₹2,00,000 moves across, with STT charged on the sale.

The first column assumes no surcharge, which applies only above ₹50 lakh of total income.

Under the 1% load quoted in the next section, nothing applies at 8 months. Had Meena switched within 3 months of buying, at the same NAVs, the load would be ₹2,000. Only ₹1,98,000 would be switched in (7,920 units at ₹25), and her gain would be ₹38,000.

See also how SIP returns are taxed and tax on debt mutual funds.

Does an exit load apply when you switch?

Yes, the old scheme's exit load applies, if it has one. Each fund house sets its own load for each scheme. The clock starts on the day each unit was allotted.

One fund's document says "An Exit Load of 1% is payable if Units are redeemed / switched-out upto 3 months from the date of allotment". One equity fund's document says "Exit Load: NIL".

SEBI sets no exit load for any of the seven hybrid categories or for index funds. Liquid funds must charge a graded load on exits within 7 calendar days, from 0.0070% on day 1 to nothing from day 7. Each SIP instalment has its own load period.

The load is already taken out of what moves across. Your gain is the amount before load, minus the load, minus your cost. The load is not deducted twice.

Switch or STP: which fits?

A switch moves money once. A systematic transfer plan, or STP, is a series of switches on a timetable. One scheme document describes it as moving a fixed amount at periodic intervals to a target scheme.

Each transfer is a switch, so each can give a gain or loss in the source fund and can carry its exit load. A sum you want to move at once suits a single switch. A sum you want to move in parts, on set dates, is what an STP does. For how an STP works, see SIP or lump sum.

Can you switch an ELSS fund?

Not while the units are locked in. An ELSS (equity linked savings scheme) has a lock-in, a period when you cannot sell, of three years from each allotment. One ELSS scheme document says units cannot be "assigned / transferred / pledged / redeemed / switched out until the completion of 3 years from the date of allotment". After the lock-in, see what to do when your ELSS lock-in is over.

A switch into an ELSS is a purchase, so those units have their own allotment date and their own three-year lock-in. The Act does not say whether money moved into an ELSS by a switch counts for the deduction under section 123 (the old Section 80C). Ask the fund house or a tax adviser before relying on it.

What to check before you switch

Check the tax class and purchase dates of the units you would switch. MF Central, a platform SEBI required the registrars to develop jointly, gives a capital gains/loss report across all mutual funds. Then read the old scheme's exit load and the new scheme's minimum amount, riskometer level (the risk label SEBI makes every fund show, on six levels from Low to Very High) and category (SEBI's label for what a fund may hold). You can compare funds at mutual funds. For whether your goal has changed, see when should you sell a mutual fund.

Koshex, as a distributor, helps you choose a fund that suits your goal and timeline. It also reviews your holdings over time and flags changes, such as a fund's category, risk or ranking shifting. Koshex customers can switch between schemes of the same fund house on Koshex.