STP in mutual funds: the Systematic Transfer Plan
A fixed sum switched from one scheme to another of the same fund house, on a schedule.
A Systematic Transfer Plan (STP) is a standing instruction to move a fixed amount at regular intervals from one scheme to another scheme of the same mutual fund. The usual pattern is a lump sum parked in a liquid or debt scheme, with a fixed sum switched into an equity scheme every week or month.
Think of it as a SIP funded from inside the fund house rather than from your bank account. Its opposite number, the SWP, redeems units on a schedule and pays the cash to you instead. Each transfer is a redemption from the source scheme and a purchase in the target scheme, and V-A tests both halves of that idea.
How an STP runs
Illustrative numbers only. Ms Kapoor receives a ₹6 lakh bonus and does not want to put it all into equity on one day.
- 1
1. Park the lump sum
She invests ₹6,00,000 in a liquid scheme of Fund House A. This is the source scheme.
- 2
2. Choose the target and amount
She registers an STP of ₹50,000 a month into an equity scheme of the same fund house, for 12 months.
- 3
3. Monthly switch
On each STP date, units worth ₹50,000 are redeemed from the liquid scheme at its NAV and units of the equity scheme are allotted at that scheme's NAV.
- 4
4. Averaging
Because the equity purchase happens at a different NAV each month, she buys more units when the NAV is low and fewer when it is high. This is rupee cost averaging, the same effect a SIP gives.
- 5
5. End of plan
After 12 transfers the liquid scheme holds only the income it earned along the way, and the money is now spread across 12 equity purchases.
STP, SWP and SIP side by side
Money comes from
SIP
Your bank account
STP
Another scheme of the same fund
SWP
Your existing units
Money goes to
SIP
A scheme
STP
A scheme of the same fund
SWP
Your bank account
Units redeemed each time
SIP
None
STP
Yes, in the source scheme
SWP
Yes
Typical use
SIP
Investing from salary
STP
Staggering a lump sum into equity
SWP
Drawing a regular income
| Feature | SIP | STP | SWP |
|---|---|---|---|
| Money comes from | Your bank account | Another scheme of the same fund | Your existing units |
| Money goes to | A scheme | A scheme of the same fund | Your bank account |
| Units redeemed each time | None | Yes, in the source scheme | Yes |
| Typical use | Investing from salary | Staggering a lump sum into equity | Drawing a regular income |
Tax on each transfer
Every STP instalment redeems units of the source scheme, so each one can create a capital gain. Rules are under the Income-tax Act, 2025, in force from 1 April 2026; old section numbers in brackets.
- check_circleLiquid and most debt schemes are specified mutual funds (more than 65% in debt and money market instruments). Units bought on or after 1 April 2023 give short-term gains taxed at slab rate, whatever the holding period (section 76, old s.50AA).
- check_circleBecause an STP usually runs for months, not years, the gain on each liquid scheme redemption is small: only the interest earned on the units being switched.
- check_circleIf the source is an equity-oriented scheme, the usual equity rules apply: 20% on short-term gains (section 196, old s.111A) and 12.5% above ₹1.25 lakh a year on long-term gains (section 198, old s.112A).
- check_circleBuying units in the target scheme is not taxable. The holding period of the new equity units starts on each transfer date, so each instalment has its own 12-month clock.
Free account, this exam preselected.
Not the same as a transfer of IDCW
SEBI's naming rules include a 'Transfer of Income Distribution cum capital withdrawal plan', where the income distributed by one scheme is invested in another. That moves only the IDCW amount. An STP moves a fixed sum you choose by redeeming units, whether or not anything is distributed.
How V-A tests STP
The standard question gives an investor with a lump sum who fears investing in equity at a market peak, and asks which facility spreads the entry over time. The answer is STP. SIP is the trap: it also averages, but it draws from a bank account, not from a lump sum already in a fund.
Another favourite is the statement 'STP transfers are not taxable'. It is false: each transfer redeems units of the source scheme, and a redemption can produce a capital gain. Fund houses offer STPs between their own schemes, so a question that moves money to another fund house is describing a redemption and a fresh purchase, not an STP.
FAQs
What is STP in mutual fund?expand_more
A Systematic Transfer Plan moves a fixed amount at regular intervals from one scheme to another scheme of the same mutual fund, usually from a liquid or debt scheme into an equity scheme.
Is STP better than lump sum investment?expand_more
Neither is better in every case. An STP spreads entry into equity over time, which reduces the risk of investing everything at one price, while a lump sum is fully invested from day one. The choice depends on the investor's risk profile and goals.
Is tax payable on STP?expand_more
Yes, on the gain in each redemption from the source scheme. For a liquid scheme the gain is usually small and is taxed at slab rate.
What is the difference between STP and SIP?expand_more
Both invest a fixed amount at regular intervals. A SIP takes the money from your bank account; an STP takes it from units you already hold in another scheme of the same fund house.
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