Last Updated on Jul 30, 2024 by Anjali Chourasiya
You invest in mutual funds to create a corpus for your financial goals and to earn returns on your investments. But what if you need to liquidate your mutual fund investments when you need funds?
This article covers:
- Mutual fund redemption – the concept
- Reasons for redemption
- Exit load on mutual fund redemption
- What is the right mutual fund redemption time?
- How to redeem a mutual fund scheme?
- Switching vis-a-vis redemption
- Tax implications of redemption
Table of Contents
Mutual fund redemption – the concept
Redemption of a mutual fund scheme means exiting from the scheme, either partially or fully. You can either redeem a specific amount from your mutual fund portfolio or you can redeem all the units and exit from the scheme altogether.
For example, let’s assume you have invested Rs 1 lakh in a mutual fund scheme which gave you 10,000 units at a NAV of Rs 10. After a few years, the NAV stands at Rs 15. If you redeem 5,000 units, it would be called a partial redemption and you would get an amount of Rs 75,000. On the other hand, if you redeem all the units it would be called a complete redemption and you would get Rs 1.5 lakh on redemption.
Reasons for redemption
There can be various reasons why investors redeem their mutual fund investments, such as:
- If they are dissatisfied with their investment and the returns that it is generating
- If they are dissatisfied with the AMC
- If they need funds for meeting financial liabilities
- If they want to invest in another scheme for better returns
- If they do not want to continue their investments
- If the investor dies and the heirs want to redeem the investment
Exit load on mutual fund redemption
Some mutual fund schemes charge an exit load if you exit from the scheme within a specified period. For example, in the case of liquid mutual funds, if you exit from the scheme within the initial seven days, an exit load would be applicable.
This exit load is calculated on the redemption value. After deducting the load, the net value is paid to you.
For example, suppose a mutual fund scheme charges an exit load of 2% on exit within the first 12 mth. You invest Rs 1 lakh in the fund and then redeem the investment within seven months. Since you are exiting within the first 12 mth, the exit load would be applicable. If the redemption value is Rs 1.5 lakh, the load would be 2% of the same, i.e. Rs 3,000. So, when you redeem it, you would get Rs 1.47 lakh as redemption proceeds.
What is the right mutual fund redemption time?
There is no specific time that can be termed as the right mutual fund redemption time.
Redeeming the mutual fund scheme should depend on your financial goals, investment horizon and risk tolerance. Click To TweetFor example, if you need funds to meet a financial emergency, you can redeem your mutual fund investments to get the necessary funds. Similarly, if you were investing in a scheme for buying a house and you have accumulated sufficient funds, you can redeem the fund to buy the house.
On the other hand, if the equity market is falling and you don’t want to continue with your equity investments, you can redeem your equity mutual funds. So, the redemption of the mutual fund scheme should be determined by your overall financial goals, needs and strategy.
How to redeem a mutual fund scheme?
There are various modes of redeeming your mutual fund scheme. They are discussed below:
- Through the AMC: The mutual fund house allows you to redeem your investment anytime you want to. You can visit the office of the AMC and apply for redemption or redeem it online through the AMC’s website.
- Through the R & T Agent: If you have invested in mutual fund schemes through Registrar and Transfer Agents (R & T Agents), like CAMS, Karvy, and others, you can redeem through them as well. Visit their branch office or simply log into your online account and choose the redemption option. Choose the units or amount that you want to redeem and submit your request. After verification, the R & T Agent would redeem the fund and credit the amount to your bank account.
- Through your broker: If you have invested in a mutual fund scheme through a broker or a distributor, you can redeem from them. Just inform them of your redemption intention and they would help you get the funds redeemed online or offline.
- Through your Demat or trading account: If you have used your Demat or trading account to invest in mutual fund schemes, redemptions can also be done through them. Just log into your account and redeem the desired units or amount.
Switching vis-a-vis redemption
You would often come across the term ‘switch’ when you check upon your mutual fund folio. Switching means transferring your mutual fund investment from one scheme to another, partially or fully.
When you opt for switching, it is considered as redeeming. Even when you transfer the money from scheme A to scheme B, the transfer from scheme A is treated as a redemption. So, if you consider switching, know that you are, in effect, redeeming from one fund and investing in another.
Tax Implications of Redemption (Updated for Union Budget 2024-2025)
There are always tax implications when you redeem a mutual fund scheme, whether partially or fully. The specific implications depend on the type of scheme you are redeeming. Let’s take a closer look at the updated tax rules according to the Union Budget 2024-2025.
Redemption from Equity Mutual Funds
If you redeem an equity mutual fund within 12 months of investment, the returns earned are classified as short-term capital gains (STCG). The tax rate on STCG has increased from 15% to 20%. For example, if you made a profit of Rs 10,000 on a mutual fund held for 6 months, you will now pay Rs 2,000 as tax instead of Rs 1,500.
If you redeem the fund after holding it for more than 12 months, the returns earned are classified as long-term capital gains (LTCG). The LTCG tax rate has increased from 10% to 12.5%. Additionally, the tax-free limit for LTCG has been raised from Rs 1 lakh to Rs 1.25 lakh. This means that if your long-term gains exceed Rs 1.25 lakh in a financial year, only the excess amount will be taxed at 12.5%.
Redemption from Debt Mutual Funds
For debt mutual funds, the tax structure remains largely unchanged. If you redeem within 36 months of investment, the returns are classified as short-term capital gains and taxed according to your income tax slab rate.
For redemptions made after 36 months, the returns are subject to long-term capital gains tax at a flat rate of 12.5%, without the benefit of indexation. Previously, long-term gains were taxed at 20% with indexation benefits, which allowed investors to adjust the purchase price of their investments to account for inflation.
Redemption from Other Mutual Funds
For other mutual funds that do not fall strictly into the equity or debt categories, such as hybrid funds, international funds, and gold ETFs, the following rules apply:
- Short-term gains (if held for less than two years) are taxed at your income tax slab rate.
- Long-term gains (if held for more than two years) are taxed at 12.5%, with no indexation benefits.
These changes simplify the tax structure and align the tax treatment across various types of mutual funds.
Whether you redeem equity funds or debt funds, remember that the tax is charged on the returns that you have earned, not the amount that you have redeemed. Click To TweetFor example, if you invested Rs 2 lakh and on redemption, you get Rs 3 lakh, the tax would be applicable on the return of Rs 1 lakh and not on the redemption value of Rs 3 lakh.
The income tax laws are dynamic and might change in future. So, talk to your tax adviser when redeeming your mutual funds to know the applicable tax implications at that time.
If you want to liquidate your mutual fund investments, remember such liquidation would be called redemption. Redeem your funds depending on your financial needs and investment strategy. When redeeming, however, do consider the tax angle and the exit load so that you can find out the effective redemption amount that you can avail of.
