What Is Mutual Fund Redemption And How It Works?

Published On: 23-May-2022

Mutual funds have been steadily emerging as preferred investment options for retail investors and have become one of the attractive avenues to invest money. Such preferences arise from the convenience of investing in mutual funds and a wide range of mutual fund schemes investors may choose from. While investing in mutual funds is the primary step towards wealth creation, reaping the benefits of wealth created over time is equally crucial. When the investor submits the request to withdraw money from their mutual fund investments, it is called a mutual fund redemption request.

How does Mutual Fund Redemption work?

When an investor submits a mutual fund redemption request either digitally or through physical submission, such request is acknowledged with a time-stamped confirmation. In case of online submissions, the transaction confirmation is also received over registered email address and mobile number. In case of physical submission of the redemption request, the concerned officials at the Official Points of Acceptance provide an acknowledgement for receipt of redemption request which is also time-stamped.

The time of submission of redemption request assumes importance, as there is a cut-off time of 3 PM for processing of mutual fund transactions to be considered as same day transactions. If the redemption transaction is received after 3 PM, the transaction will be processed on the next working day. Once the redemption request is submitted within the cut-off time, the fund house will process the transaction and confirm within one business day. The redemption proceeds are thereafter credited to the investor's registered bank account, subject to deduction of the applicable STT and stamp duty.

Things to Consider while submitting Redemption Request

While financial needs may drive the redemption request, there are some essential things to keep in mind by the investors while submitting a redemption request:

Exit Load

Some mutual fund schemes carry an exit load to be paid by the investors if the units are redeemed before the specified period. Such exit load is levied on the redemption NAV, and accordingly, it directly impacts the overall portfolio returns. If the exit load window is nearing an end, it may be prudent to defer the redemption request up to that period to protect the portfolio returns.

Lock-in Period

Some of the mutual fund categories are subject to a lock-in period. For example, ELSS (Equity Linked Savings Scheme) funds are subject to a 3-year lock-in period. Similarly, solution-oriented schemes carry the lock-in period of 5 years or till retirement age or attainment of the majority age by the child. The investor cannot liquidate the investments until the lock-in period is over. The investors need to consider the lock-in period expiry while planning mutual fund redemption.

Holding Period for Taxation

There are different tax rates for long-term capital gains (LTCG) and short-term capital gains (STCG) from mutual fund investments. The tax rates for LTCG are generally lower than STCG to incentivize long-term investing by the taxpayers. The gains are classified as LTCG and STCG based on the holding period of such mutual fund units. One must take care that if the redemption request can be deferred until the time the gains become long term, it is advisable to defer the redemption request until such time. Any savings on taxes directly impact the overall portfolio returns favourably.

Tax Incidence post processing of the Redemption Request

While the NAV of mutual funds is declared daily, the appreciation is taxed only at the redemption of mutual funds units. The tax rates for capital gains also depend upon the asset allocation pattern of the mutual fund scheme. As per the Income Tax laws, an equity-oriented fund must invest at least 65% of its assets in equity securities and equity-related securities. The mutual fund schemes not complying with this asset allocation pattern are covered under non-equity oriented funds.

As per the tax laws, the tax rates and cut-off holding period for classifying gains as Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) are different for equity funds and non-equity funds. The cut-off period for equity funds is 12 months, while for non-equity funds, including debt funds, the specified cut-off period is 36 months. Gains from investments with shorter holding periods are classified as STCG, and gains with more extended investment periods are classified as LTCG.

The tax rate for STCG from equity funds is 15% (plus applicable cess and surcharge), while the tax rate for LTCG is 10% (plus applicable cess and surcharge) without indexation benefit. Additionally, LTCG from equity shares and equity funds of Rs. 1 lakh in aggregate every year are taxed at a zero rate. In contrast, STCG from non-equity funds is taxed at regular tax rates applicable to the investor, while LTCG from debt funds is taxed at 20% (plus applicable cess and surcharge) post indexation benefit.

Note: The tax provisions mentioned in the article are for illustrative purposes only and are updated as per the Union Budget 2022 presented in the Parliament in February 2022. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the investment date.

Disclaimer-

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

To know about the KYC documentary requirements and procedure for change of address, phone number, bank details, etc. please visit https://www.utimf.com/servicerequest/kyc. Please deal with only registered Mutual funds, details of which can be verified on the SEBI website under "Intermediaries/market Infrastructure Institutions".  All complaints regarding UTI Mutual Fund can be directed towards service@uti.co.in and/or visit www.scores.gov.in (SEBI SCORES portal). This material is part of Investor Education and awareness initiative of UTI Mutual Fund.

Tax disclaimer -

Equity Linked Savings Scheme (ELSS) is an open-ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit. Minimum investment in equity & equity related instruments - 80% of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance). As per the present tax laws, eligible investors (Individual/HUF) are entitled to deduction from their gross total income, of the amount invested in equity linked saving scheme (ELSS) upto Rs. 1,50,000/- (along with other prescribed investments) under Section 80C of the Income Tax Act, 1961. Subject to prevailing tax laws.