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Capital Gains Tax
Long Term Capital Gains-   Units held for more than 12 months
Investment more than twelve months will be treated as a long term capital asset for the computation of capital gains and there is currently no long-term capital gain tax liability for redemptions from equity schemes, however there is a liability at the time of redeeming from the debt schemes.
 
Short Term Capital Gains- Units held for 12 months or less
Investments held for 12 months or less will be treated as short term capital asset for the computation of capital gains and would attract short-term capital gains tax.

Under Section 10(35) of the Income Tax Act dividend received is tax free in the hands of the investor. However, there is a distribution tax (including surcharge & cess) payable by the MF directly to the exchequer. So in effect, the investor would stand to receive that much lesser dividend.
 
Tax liability on switching from one scheme to the other?

Tax liability on switching from one scheme to other, the investor is liable to pay tax on capital gains as applicable.

Now there is some good news. You can save tax by investing in mutual funds.
ELSS- More than just tax saving!
The common answer to the often-asked question by anxious investors, as to what is the best way to save tax, is to invest in Post Office savings schemes, or perhaps a regular investment in a public provident fund, or to buy insurance policies. It is unfortunate that the greatly advantageous Equity Linked Savings Scheme (ELSS) is hardly ever mentioned, which is not a surprise, since, even though it is one of the high yielding products, it remains one of the lesser known ones. That is another reason that investors do not yet comprehend the potential benefits of this product.
 
ELSS is an efficient investment tool that offers the twin-advantage of healthy capital appreciation and reduced tax burden. In our work-a-day life, we exert ourselves utmost to save every penny but are exasperated when taxes eat into our savings.
 
Under section 80C, Indians can invest upto Rs 1 lakh in ELSS (Equity Linked Saving Scheme, also commonly known as Tax Saver schemes) funds per year/per individual.
 
Why should one invest in ELSS?
  • Lock-in for three years helps in staying invested over a long period.
  • Investments in equity funds over a long-term delivers better returns.
  • Tax savings and high returns.
  • Through SIPs, one can invest even a small amount of Rs 500 in ELSS every month.