Types of Transactions — Purchase, Redemption, Switch, STP
An investor transacts in a mutual fund by purchase, redemption, switch or systematic transfer. This lesson explains what each one is, when redemption money is paid and which transactions are taxable events.
Purchase and redemption
A purchase, whether a lump sum or a SIP instalment, buys units at the applicable NAV after stamp duty of 0.005%. A redemption sells units back at the applicable NAV less any exit load. It can cover all or part of a holding and can be stated as an amount or as a number of units.
Redemption proceeds are due within 3 working days of the request, or 5 for schemes with 80% or more invested overseas. The rules set no separate, shorter timeline for debt or liquid funds. Late payment earns interest at 15% a year, borne by the asset management company (AMC).
Exit load, where it applies, is deducted from the redemption amount and credited back to the scheme, net of GST.
Switch and STP
A switch is two transactions: a redemption from one scheme and a purchase in another scheme of the same fund house. The redemption is a taxable event if there is a gain. The purchase is not taxable; it starts a new holding period and attracts stamp duty of 0.005%.
A Systematic Transfer Plan (STP) repeats such a switch at set intervals, and each transfer is a separate redemption. Twelve monthly transfers therefore create twelve taxable events, not twenty-four.
Lock-in and instant access
ELSS units are locked in for 3 years from allotment, and each SIP instalment is a separate purchase with its own lock-in.
Liquid and overnight schemes may offer an instant-access facility, limited to ₹50,000 or 90% of the holding, whichever is lower.
Tax on redemption (rates as of October 2026)
For equity-oriented funds, gains on units held 12 months or less are taxed at 20% under section 196 of the Income-tax Act, 2025 (section 111A of the old 1961 Act). Gains on units held longer are taxed at 12.5% on the amount above ₹1.25 lakh a year, under section 198 (old section 112A).
For funds with more than 65% in debt and money-market instruments, bought on or after 1 April 2023, gains are taxed at the investor's slab rate whatever the holding period. Unit values can fall as well as rise, so a redemption can also result in a loss.
Rules at a glance
Instant-access limits (illustrative)
Two investors hold units in a liquid scheme that offers instant access. Kiran's holding is worth ₹40,000. Ninety per cent of it is ₹36,000, which is lower than ₹50,000, so ₹36,000 is the most available through the facility.
Leela's holding is worth ₹3,00,000. Ninety per cent of it is ₹2,70,000, so the ₹50,000 limit applies instead.
A switch, step by step (illustrative)
- Assumptions for the arithmetic only: Imran switches 4,000 units of Scheme A (NAV ₹50, with an exit load of 1% on these units) into Scheme B (NAV ₹25) of the same fund house.
- Redemption value = 4,000 × ₹50 = ₹2,00,000.
- Exit load = 1% × ₹2,00,000 = ₹2,000, credited back to Scheme A net of GST. Amount switched = ₹2,00,000 − ₹2,000 = ₹1,98,000.
- Stamp duty on the purchase in Scheme B = 0.005% × ₹1,98,000 = ₹9.90, leaving ₹1,97,990.10.
- Units in Scheme B = ₹1,97,990.10 ÷ ₹25 = 7,919.604.
Result. Imran receives 7,919.604 units of Scheme B. The redemption from Scheme A is a taxable event if there is a gain, and the holding period of the new units starts afresh.
Key points
- A purchase buys units at the applicable NAV after stamp duty of 0.005%; a redemption pays the applicable NAV less any exit load.
- Redemption proceeds are due within 3 working days of the request, or 5 for schemes with 80% or more invested overseas; delay earns interest at 15% a year.
- Each redemption, including the redemption leg of a switch or STP, is a taxable event if there is a gain; the purchase leg starts a new holding period.
- ELSS units are locked in for 3 years, instalment by instalment.
Common misunderstandings
- A switch is not tax-neutral because the money stays with one fund house: its redemption leg is a taxable event if there is a gain.
- An STP of 12 transfers does not create 24 taxable events: only the redemption leg of each transfer is one.
- An ELSS SIP does not become free all at once after 3 years: each instalment has its own lock-in.
Questions people ask
Does the fund house keep the exit load?
No. Exit load is deducted from the redemption amount and credited back to the scheme, net of GST.
Can part of a holding be redeemed?
Yes. A redemption can be for all or part of a holding, by amount or by units.
Is the purchase leg of a switch taxed?
It is not a taxable event. It attracts stamp duty of 0.005% and starts a new holding period.
What this lesson relies on
- SEBI Master Circular for Mutual Funds (20 March 2026) — redemption timelines, interest on delay, instant-access facility
- Income-tax Act, 2025 — sections 196 and 198 (sections 111A and 112A of the 1961 Act)
- Indian Stamp Act, 1899, as amended by the Finance Act, 2019 — stamp duty on mutual fund units from 1 July 2020
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.