Tax implications of SIP: Know all about how tax is calculated on mutual fund SIPs

Updated: May 28, 2018 1:31 PM

To make the most of mutual fund SIPs, it is necessary for you to be aware of its various tax implications.

SIP, mutual fund, mutual fund SIP, Tax implications of SIP, mutual fund investment, mutual fund sahi hai, LTCG tax, STCG taxWhen you redeem mutual fund investments, you are liable to pay capital gains tax in that year.

SIP (Systematic Investment Plan) is the best way to invest your money in mutual funds (MFs) for creating wealth over a long period and achieving your long-term goals. However, to make the most of SIPs, it is also necessary for you to be aware of its various tax implications.

When you redeem mutual fund investments, you are liable to pay capital gains tax in that year. Capital gains on SIPs are applicable on a First-In-First-Out (FIFO) basis. What this means is, the gains are calculated against each instalment, starting from the first one.

Suppose you have a monthly SIP of Rs 10,000 in an equity fund, running from 1st March 2017. You decide to redeem Rs 50,000 on 10th June 2018. Investments from the earlier months will be redeemed until the amount specified is reached.

For equity funds, redemption made beyond 12 months of purchase attracts Long Term Capital Gains (LTCG) tax while redemption up to 12 months attract Short Term Capital Gains (STCG) tax. So, in this case, LTCG tax will be applicable  on gains from the first three months and STCG tax on gains of the fourth month of your SIP, as illustrated below:

DateNAVUnits allotted (10,000/NAV)Value of units sold @ NAV 27.5 on 10th June 2018Gains/ProfitsTax
1st Apr 201721.25470.5912,9412,941LTCG
1st May 201721.68461.2512,6852,685LTCG
1st June 201722.41446.2312,2712,271LTCG
1st July 201722.72440.1412,1042,104STCG
1st Aug 201723.04434.0311,936
1st Sep 201723.45426.4411,727
1st Oct 201723.89418.5911,511

However, you will have to pay the tax only if your aggregate gains from equity exceeds Rs 1 lakh in a year. This includes gains from both equity mutual funds and direct investment in shares.

The same principle of tax calculation applies to SIPs in the non-equity funds. The only difference is in the investment holding period; for non-equity funds LTCG is applicable beyond 36 months and STCG up to 36 months.

Some more pertinent things to note:

# Your equity fund SIP redemptions are taxable only if your gains from equities exceed Rs 1 lakh in a year.

# Tax rates are different for equity and non-equity funds. They are higher for non-equity funds by 10-15%.

# If you have invested in the dividend option, Dividend Distribution Tax (DDT) will be applicable.

# TDS is applicable for NRI (Non-resident Indians) investors.

Tax rate ready reckoner:

SIP inLTCGSTCGDDT
Equity funds10%15%10%
Nonequity funds20% with indexation30%25%

(By Amar Pandit, CFA and Founder & Chief Happyness Officer at HappynessFactory.in)

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