Systematic Transfer Plan Taxation

How is the Systematic Transfer Plan Taxed?

A systematic transfer plan (STP) is an investment strategy which allows you to transfer money from one of your pre-existing funds to another fund. These transfers are generally made from debt-based funds to equity funds to redirect pre-existing investments into high-risk and high-reward funds.

It is important to note that every transfer via STP is considered an individual transaction. This means that when units are sold in the source fund and redirected to buy units in the target fund, both of these actions are considered individual transactions. Selling of units is a taxable action, and every transfer is thus taxed individually.

1. Taxation on Fund Type

   The following table lists the tax percentage levied on different funds.

   Fund Type	Short Term Capital Gain	Long Term Capital Gains
   Debt Fund/ liquid fund	Tax based on the income tax slab rate.	After the 2024 budget, all debt funds bought after 1 April 2023 are taxed as short-term capital gains. However, debt funds bought before 1 April 2023 are taxed as long-term capital gains at a flat 12.5%
   Equity Funds	20%	If you hold the fund for more than 12 months. Gains up to ₹1.25 lakh are tax-exempt. All gains above ₹1.5 lakh are taxed at 12.5%.

2. Example of Taxation on STP

   • You invest ₹2,00,000 in a liquid debt fund with a NAV of ₹1000 per unit, which we assume to grow by 5% every month.
   • Thus, you buy a 100 units of the fund
   • Since the units are bought after May 1 2026, they are taxed at your income tax slab rate, which is assumed to be 30%.
   • You start an STP in 2024 and redirect ₹10,000 every month into an equity fund.
   • As mentioned above, when you sell units in your source fund, the profit is taxed at your income tax slab.
   • Thus, when you redirect ₹10,000 every month to an equity fund, the profit, which is 4.76%, is taxed at 30%
   • ₹10,000 × (5/105) = ₹476.19 (₹476 is the profit earned on ₹10,000)
   • 30% of ₹476.19 = ₹142.86

   Thus, ₹142.86 of the ₹10,000 will be deducted as tax, and the remaining amount will be redirected to the equity fund. Note that the NAV value is dictated by market performance and can vary accordingly. Thus, from month 2 onward, NAV will compound, so the profit % embedded in each ₹10,000 redemption will keep changing, not staying flat at 5%/₹500 every month.

Tax Saving Tips for Systematic Transfer Plan

Here are some tax-friendly tips you can apply to your investments to ensure that your corpus is at its best possible:

• Align your investments with long-term goals: If you’re using an equity fund as your source fund, aim to turn the profits into long-term capital gains. If your gains are below ₹1.25 lakh, your transfer will be tax-free. Since all gains are considered short-term capital gains under debt/liquid funds, you’ll be taxed similarly across all time horizons.
• Use staggered redemption: Use staggered redemption and spread your STP across several financial years if you have a long-term investment goal. This can help you lower tax liability while staying in lower tax brackets.
• Invest in capital appreciation STP: You can invest in a capital appreciation STP, which only redirects the profits from your source fund to your target fund. This will keep your original capital safe while your profits are reinvested.
• Holding period in the target fund: It is advised to hold the investment in the target fund so that you can reap tax benefits in the long run.

STP, SWP, SIP Tax Comparison

The following table summarises the key taxation differences between Systematic Transfer Plan, Systematic Investment Plan and Systematic Withdrawal Plan.

You can further read the difference between SIP, SWP and STP to know what is best for you.

Conclusion

STP provides the investor with a great way to redirect stagnant investments into high-performing funds without adding any additional money. However, it is very important for the investor to understand how their STP transfers are taxed in order to create the best transfer plan for themselves and develop a healthy corpus.