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Personal Finance News

Do I need to pay taxes when rebalancing my mutual fund investment portfolio?

rajeev kumar
By Rajeev Kumar

4 min read | Updated on June 19, 2025, 11:09 IST

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SUMMARY

Switching mutual fund units from one scheme to another is treated as ‘Redemption’ from the existing scheme and ‘Fresh Purchase’ in the new scheme, even though both schemes belong to the same AMC. Thus, such a switch is considered taxable under the Income Tax Act.

tax on portfolio rebalancing

Tax liability can arise when rebalancing a mutual fund portfolio. | Image source: Shutterstock

Question: I want to rebalance my mutual fund investment portfolio by selling some mutual fund units and reinvesting the sale proceeds (including gains) in other funds. But I have the following concerns about the tax liabilities that may arise due to this:

  1. Do I have to pay tax if I sell units of a mutual fund and invest the total proceeds (including LTCG+STCG) in another fund of the same AMC?

  2. Do I have to pay tax if I sell units of a mutual fund and invest the total proceeds (including LTCG+STCG) in another fund of another AMC?

Answer by CA Foram Naik Sheth, NPV Associates LLP - KMP Wealth Management Solutions.
Query 1: Yes, you are required to pay tax on any capital gains, whether short-term or long-term, even if you reinvest the entire redemption amount (both principal and gains) into another mutual fund scheme within the same Asset Management Company (AMC).

As per the Income Tax Act, switching units from one scheme to another is treated as ‘Redemption’ from the existing scheme and ‘Fresh Purchase’ in the new scheme, even though both schemes belong to the same AMC. Thus, such a switch is considered taxable under Income Tax Act.

The switch can be of many kinds:

Switching from ‘Regular’ to ‘Direct’ option and vice versa: Moving investment from a regular plan (with distributor) to a direct plan of the same mutual fund scheme or vice versa.
Switching from Growth to Dividend/IDCW Option and vice versa: Changing your plan between Growth (Does not distribute income but adds it to the NAV) and Dividend/ IDCW (Income Distribution cum Capital Withdrawal) options of the same scheme.
Switch between Schemes within the same AMC: Changing from one scheme to another due to changing goals or portfolio rebalancing.

Switches are not considered tax exempt simply because they occur within the same AMC or same scheme.

All of the above scenarios will attract capital gain tax as per Income Tax Act.

In short, Switching = Redemption = Capital Gain = Taxability.
Query 2: The answer remains the same as above for the second query also. You are required to pay tax on any capital gains, whether long-term (LTCG) or short-term (STCG), even if you reinvest the full proceeds into a mutual fund scheme of another Asset Management Company (AMC).

Any sale of Mutual Fund units will attract Long-term or Short-term Capital gain Tax as the case may be.

The key difference between switching within the same AMC and to a different AMC lies in the mechanism of the switch, not in the tax treatment:

Switching within the same AMC: Units are redeemed from one scheme and the proceeds are internally (and directly) transferred to the new scheme, which is treated as a redemption and purchase for tax purpose.
Switching to another AMC: The redemption amount is credited to your bank account, and you must manually invest it in the new AMC’s scheme, which is still treated as a redemption and purchase for tax purposes.

However, in both scenarios, shifting from one mutual scheme to another will be considered as redemption, whether within the same fund house (AMC) or to another fund house, and will attract Capital Gain tax.

The tax liability on the gain portion of redemption in both cases will be as follows:

Equity Mutual Fund:

  • Short-term (held <1 year): 20% tax on STCG.
  • Long-term (held ≥1 year): 12.5% tax on LTCG exceeding ₹1.25 lakh per financial year
Debt Mutual Fund (Purchased after March 31, 2023):
  • Entire capital gain is taxed as short-term, irrespective of the holding period.
  • Taxed at your applicable income tax slab rate.
Debt Mutual Fund (Purchased before 1st April,2023):
  • Short-term (held<2 years): Slab rare on STCG
  • Long-term (held ≥2 years): 12.5% on LTCG, No Indexation
Disclaimer: The views and opinions expressed above are those of respective experts/commentators and do not reflect the views of Upstox. This content is only for informational purposes and should not be considered investment advice from Upstox.
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About The Author

rajeev kumar
Rajeev Kumar is a Deputy Editor at Upstox, and covers personal finance stories. In over 11 years as a journalist, he has written over 2,000 articles on topics like income tax, mutual funds, credit cards, insurance, investing, savings, and pension. He has previously worked with organisations like 1% Club, The Financial Express, Zee Business and Hindustan Times.