For equity funds, switching is usually worth the tax: it is taxed once, the direct plan's lower cost saves money every year after, and with gains near 30% of the holding and a 0.9-point cost gap, the saving covers the tax within about four years. A new SIP can start direct at once, with nothing to sell. Amit's ₹20 lakh is worked below, with a table from ₹5 lakh to ₹40 lakh.
What happens when you switch regular to direct?
Every scheme has two plans with the same holdings. The regular plan charges a higher expense ratio, its yearly cost, and pays part of it to the distributor who sold it; the direct plan pays no commission. The mutual funds guide prices that gap on a new SIP.
A switch sells regular units and buys direct ones, so it is taxed as a redemption, oldest units first. Equity units held over 12 months pay 12.5% on long-term gains above ₹1,25,000 in a financial year (section 112A of the 1961 Act), and units held 12 months or less pay 20% (section 111A), each plus 4% cess, rates from 23 July 2024 and unchanged for FY 2026-27.
Debt-fund units are taxed differently, at your slab rate if bought since 1 April 2023, so the sums below do not apply to them; how mutual fund gains are taxed covers each type.
Since April 2025, fund houses charge no exit load on a switch to the direct plan of the same scheme. Moving to a different scheme is a redemption, so the old scheme's exit load applies to units still inside its load period, often the first year for equity schemes.
What does switching ₹20 lakh in one go cost Amit?
Amit, 36, earns ₹28 lakh a year. He holds ₹20,00,000 in two regular-plan equity schemes, with ₹6,00,000 of gains, and runs a ₹25,000 regular SIP. Its last twelve instalments, about ₹3,00,000, are worth about what he paid, so all the gain is on units held over a year.
Switching it all in October 2026, with no other equity gains this financial year:
- Taxable gain: ₹6,00,000 minus the ₹1,25,000 exemption = ₹4,75,000
- Tax: ₹4,75,000 × 12.5% = ₹59,375, plus 4% cess = ₹61,750
Against that, assume expense ratios of 1.8% in the regular plan and 0.9% in the direct plan, on a 12% return before costs (October 2026 assumptions, not forecasts). The 0.9-point gap saves about ₹18,000 in the first year on ₹20,00,000, more as the money grows.
Over 15 years, compounded yearly, ₹20,00,000 grows to about ₹85,85,000 in the regular plan and about ₹96,99,000 in the direct plan, a gap of about ₹11,14,000. The cost gap differs by scheme and is usually smaller in large schemes. The trail commission post shows where to find your own figure.
At the first year's saving, the ₹61,750 is covered in about 3.4 years, or about six years at a 0.5-point gap. Much of that tax is paid early, not extra: direct units start at a cost of ₹20,00,000, so the ₹6,00,000 is not taxed again. Yearly slices, each carrying no more than ₹1,25,000 of gain, would cut the tax to nil, but that route is slower than it sounds.
Is there a cheaper route than one go?
Yes: two slices either side of 31 March use two years' exemptions. Amit switches units carrying half the gain now and the rest after 1 April 2027: (₹6,00,000 minus ₹2,50,000) × 12.5% × 1.04 = ₹45,500 on today's gain, or ₹16,250 less; tax on any rise by April is paid early, not extra. The units that wait, roughly half, pay about ₹4,500 in the 0.9-point gap meanwhile.
Yearly slices pay no tax, but waiting units keep growing. At the assumed 10.2% after costs, ₹17,00,000 of older units gains about ₹1,73,000 a year, more than one slice can carry. With one switch now and one each April, Amit would finish in about 11.5 years. The extra cost on waiting units would reach about ₹87,000, worth about ₹61,700 today at that return, roughly the tax avoided, and each year's exemption would be tied up until 2038 instead of covering gains on the direct units.
Other sizes, with long-term gains at 30% of the holding, no other equity gains that year and years at the first year's saving (a surcharge applies above ₹50 lakh of income):
| Holding (gain) | Tax in one go | Two-slice tax on today's gain | Yearly saving, 0.9-point gap | Years to cover one-go tax |
|---|---|---|---|---|
| ₹5,00,000 (₹1,50,000) | ₹3,250 | nil | ₹4,500 | under 1 |
| ₹10,00,000 (₹3,00,000) | ₹22,750 | ₹6,500 | ₹9,000 | 2.5 |
| ₹20,00,000 (₹6,00,000) | ₹61,750 | ₹45,500 | ₹18,000 | 3.4 |
| ₹40,00,000 (₹12,00,000) | ₹1,39,750 | ₹1,23,500 | ₹36,000 | 3.9 |
How does Amit make the switch?
He cancels the regular SIP and registers a ₹25,000 direct-plan SIP; new money moves with no tax. He then requests a switch to the same scheme's direct plan on the fund house's website or app or the registrars' common portal. Units under a year old can wait until they turn a year, so any gain is long-term; each instalment has its own 12-month clock, as the SIP guide shows.
The exemption is shared with any shares or equity ETFs he sells that year. A distributor earns nothing on direct units, so expect questions; a SEBI-registered investment adviser is paid a fee instead and works with direct plans.
Dhi maps your investments to your goals and answers questions like this one from your own numbers. Dhi earns no commissions and never mis-sells.
Frequently asked questions
This is general information for salaried individuals in India, not personalised financial advice.
