Mutual fund units like all other investments have to be encashed, when you make a profit.
Charges when you redeem or sell mutual fund units
The first and the foremost charge would be the exit load. Every mutual fund unit schemes has an exit load. Mostly, investors would be levied a 1 per cent charge, if you redeem the units before 1-year.
So, you would be able to sell or redeem the mutual fund units at the net asset value and thereafter a deduction of 1% would take place.
Take note of the lock-in period
You cannot redeem or sell mutual fund units, if there is a lock-in period. Unit Linked Insurance Plans have a lock-in of 5-years, while equity Linked Insurance Plans have a lock-in period of 3 years.
There is no TDS that is applicable
One of the charges that you do not have when you sell or redeem the mutual fund units is TDS. However, units from mutual funds are taxable and you have to note the tax provisions accordingly.
Check the cut-off time
You need to also check the cut-off time, before which you submit. Otherwise, you may end-up getting the net asset value for an altogether different date. Mostly, it would be the previous date. If it is higher on that date the better.
Mutual funds are not free from income tax. The tax rates depend on the holding period and also whether it is an equity mutual fund scheme or a debt mutual fund scheme.
For equity mutual fund schemes held over a period of 1 year, there is no tax. On the other hand, for equity mutual fund schemes held under a period of 1 year, there is a tax liability that arises, which would be 15 per cent. This 15 per cent, does not include the applicable education cess and other charges.
If you are into a fund that is a debt fund the tax rates would be 20 per cent with indexation, if you hold these funds for more than 36 months.
If held for 36 months or less, you would be taxed as per your tax slab.
What happens when you receive dividend from a mutual fund?
It is very important to understand one thing. If you are receiving dividends from mutual funds, it is tax free. However, if you opt for the growth scheme, it would be taxed. So, always go for the dividend scheme. Dividends is tax free in the hands of the investor, though the fund house would be paying dividends.
In short, look at the various charges, when you sell or redeem your mutual fund unit. Hold onto the units, by studying the tax liability. You also need to hold onto the units, depending on your tax liability.
The longer you hold onto the units, lesser would be the exit or or mostly nil and lesser, would be your tax liability.