Mutual Fund Redemption: Process, Taxation and Rules

Mutual funds offer flexibility and liquidity, making them a popular investment choice. However, when it comes to redeeming your investment, it is crucial to understand the process, taxation, and rules governing mutual fund redemption. This guide covers everything you need to know about the mutual fund redemption process, the taxation, and the rules involved.

What is Mutual Fund Redemption?

Mutual fund redemption is the process of withdrawing your investment from a mutual fund scheme by selling your units. When you redeem, the fund house pays you the current value of your holdings based on the scheme’s Net Asset Value (NAV) on the redemption date. The amount is credited to your bank account within a few working days, depending on the type of fund.

Types of Mutual Fund Redemption 

Mutual fund redemptions can be classified into different types based on the investor’s objective:

• Regular Redemption

This is the standard way of withdrawing money from a mutual fund investment. Investors redeem their units either partially or fully based on their financial needs. The redeemed amount is credited to the registered bank account within the stipulated time frame.

• Systematic Withdrawal Plan (SWP)

SWP allows investors to withdraw a fixed amount from their mutual fund investments at regular intervals (monthly, quarterly, or annually). This method is commonly used by retirees for a steady income stream.

Example: An investor may set up an SWP to withdraw ₹10,000 every month from their equity fund to cover monthly expenses.

• Redemption due to Fund Closure

If a mutual fund scheme is closed or wound up by the AMC due to regulatory changes, underperformance, or other reasons, investors are automatically refunded the equivalent amount of their holdings.

• Emergency Redemption

Investors may need to redeem funds due to urgent financial requirements such as medical emergencies, education expenses, or unexpected liabilities. However, early redemption may attract an exit load and tax implications, depending on the type of fund.

• Redemption after Lock-in Period (ELSS Funds)

Equity Linked Savings Schemes (ELSS) have a mandatory lock-in period of three years. Investors can redeem their units only after this period expires.

• Auto-Redemption (For Fixed Maturity Plans - FMPs)

Fixed Maturity Plans (FMPs) have a pre-defined tenure, after which the fund automatically redeems the units and credits the amount to the investor’s account.

How to Redeem Mutual Funds?

Redemption of your existing mutual fund units is very easy. You can redeem mutual funds through multiple channels:

1. Through AMC Website or App

• Log in to the asset management company's (AMC) website or app.

• Navigate to your investment portfolio and select the scheme.

• Enter the number of units or the amount to be redeemed.

• Confirm and submit the request.

2. Via Registrar’s Website (CAMS/Karvy)

• Visit the registrar’s portal handling your mutual fund scheme.

• Authenticate your account and choose the redemption option.

• Complete the process by specifying the amount of units.

3. Using Demat Account/Brokerage Platform

• If your mutual fund units are held in demat form, log in to your broker’s platform.

• Navigate to the mutual fund section and initiate the redemption request.

4. Offline Method

• Fill out a redemption request form and submit it at the AMC or distributor’s office.

• The redeemed amount is credited to your registered bank account.

Tax Implications on Mutual Fund Redemption

Taxation on mutual fund redemption depends on the type of scheme and holding period:

• If your gains are within ₹1.25 lakh from equity funds in a financial year, LTCG tax is not applicable.

• STT (Securities Transaction Tax) is levied on equity fund redemptions but not on debt funds.

• Dividends received before 2020 were tax-free but are now taxable as per your income slab. 

Factors to Consider Before Redeeming Mutual Funds

Before initiating a redemption request, consider these factors:

• Exit Load: Some funds charge an exit load if redeemed within a specific period. Check the scheme’s details before withdrawing.

• Tax Impact: Understand the tax liability based on the type of mutual fund and holding period.

• Market Conditions: Redeeming equity funds during a market downturn may lead to losses.

• Financial Goals: Ensure the redemption aligns with your investment objectives and does not disrupt long-term financial planning.

• Alternative Liquidity Options: If you need funds, consider taking a loan against mutual funds instead of redeeming them.

Mutual Fund Redemption Rules

SEBI and AMFI regulate mutual fund redemptions. Here are the key rules:

• Redemption Processing Time:

  • Liquid & Overnight Funds: Within T+1 day.

  • Equity & Debt Funds: Within T+2 or T+3 days.

• Minimum Balance Requirement: Some funds require maintaining a minimum balance post-redemption.

• NAV Applicability:

  • Redemption requests before 3:00 PM are processed at the same day’s NAV.

  • Requests after 3:00 PM get the next business day’s NAV.

• Lock-in Period: ELSS funds have a mandatory 3-year lock-in, restricting premature withdrawals.

Conclusion

Understanding the mutual fund redemption process helps in making informed decisions while minimising costs and tax implications. Whether withdrawing funds for financial needs or portfolio rebalancing, evaluating factors like exit load, tax impact, and market conditions ensures you maximise returns.