THOSE who invest in mutual funds via systematic investment plan (SIP), will agree how simple and easy it is. Your money is invested automatically in your choice of funds. However, the situation changes when you sell these investments. Gains have to be calculated and tax must be paid.
Let’s first understand how SIPs work. Every month SIP instalment is deducted from your bank account. With this fixed amount, units of a fund are purchased. The invested amount remains same but the number of units bought varies. This is because the NAV keeps fluctuating.
To calculate gains, FIFO method should be applied. FIFO means units which are bought first are considered as sold first.
Here’s an example. Aditya committed to a SIP of R10,000 in an equity mutual starting July 2015. In the first month, 200 units were purchased. Over a period of seven months, Aditya invested a total of R70,000 and purchased 1,371 units (see Table 1).
Aditya decided to sell some of his mutual fund holdings on September 1, 2016. He sold 850 units at an NAV of R55. Let’s find out his gains via the FIFO method. Units bought in July, August, September and October are considered as sold first. From the purchases made in November, 41 units are taken as sold, since a total of 850 units have been sold. NAV on sale date is R55 and sale receipts amount to R 46,750 with gains standing at R4,647 (see Table 2).
Tax treatment of gains
Tax treatment of gains differs for an equity mutual fund and a debt mutual fund. You must identify the type of your fund. Equity funds invest 65% or more in equity shares. Debt funds invest 65% or more in debt based instruments, such as government bonds, certificates of deposit, etc. ELSS and liquid funds are equity based. Funds which are called ‘midcap fund’ or ‘small cap fund’, are also equity funds.
Investments in equity funds are considered to be short-term investments when held for 12 months or less and short-term gains are taxed at 15%. When sold after 12 months, long-term gains arise which are exempt from tax. Investments in debt funds are considered short-term when held for 36 months or less and taxed at slab rates. Long-term gains arise when investments in debt funds are sold after 36 months. Such gains are taxed at 20% after indexation. In the above example, long-term gains of R2,660 are exempt from tax. And short-term gains of R1,987 are taxed at 15%.
The writer is chief editor at www.cleartax.com and a chartered accountant