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Tax on SIP

  June 12,2021

Know how SIP investments taxed

For the last few years, Systematic Investment Plans (SIPs) have become one of the popular ways to invest in the markets through mutual funds. However, before the reintroduction of Long-Term Capital Gains (LTCG) tax in the budget of 2018, long-term SIP returns from equity funds were completely tax free, as equity funds were exempted from Long Term Capital Gains (LTCG).

Now, after the change in this law, several investors are unsure of how they should calculate their SIP returns and tax liability. To ease out this problem, let’s see the tax angle of SIP investment. Basically, the tax on SIP currently depends upon whether the investment was made in a non-equity or an equity fund, as they have different tax rates.

How Does SIP Taxation Differ?

Unlike lump sum investments that are only one investment, SIP is made multiple times over a period. While you may consider a one-year-long SIP as one investment, when it comes to taxation, every instalment is regarded as an additional investment.

This way, the holding period of every instalment gets calculated.

Tax on SIP Investments on Equity Funds

For instance, suppose you started a monthly SIP in the equity scheme on 1st January 2020. On 2nd January 2021, you decided to redeem the investment.

In such a scenario, only the capital gains on the purchased units from your first instalment, the one made on 1st January 2020, will be considered as the Long TermCapital Gain (LTCG) as you have held the same for a period of more than one year. There is no tax on longterm capital gains below Rs.1 lakh. Capital gains above Rs. 1 lakh are taxed at 10%.

For the rest of the instalments, the holding period will be considered less than one year. Thus, the gains will be short-term. Short Term Capital Gains(STCG) of 15% will apply on these units.  

Here, the ‘first in first out’ rule is followed. This means the units purchased first will get redeemed first.

Tax on SIP investments on Debt Funds

However, if you had invested through SIP in a debt or debt-oriented hybrid funds, LTCG will apply on units that were invested for over 36 months and the profit is taxed at a rate of 20% after indexation.

For investments below 36 months, the capital gains are added to income and taxed as per the income tax slab.

How is the Gains on SIP Investment Calculated?

Put simply, tax on the total investment of SIP is the total sum of tax payable on every instalment. To calculate the same, an individual calculation of tax on each instalment has to be done. Jotted down below is the entire step-by-step procedure.

  • First of all, the classification of equity and the non-equity fund is done
  • Second, the holding period is computed to discover whether the gains are long-term or short-term capital gains
  • Then, the cost of purchase is noted for every instalment
  • In case the funds are equity, it has to be checked whether the grandfathering clause is going to be applicable (this is for investments that have been made before 31st January 2018).
  • However, if it is a debt fund, it has to be figured out whether LTCG will be applicable. If yes, adjustment for indexation will be made
  • Next, the calculation of applicable tax for every instalment will have to be done
  • Short-term and long-term gains will be separated
  • Approximate tax rates will be applied to find the payable tax amount

Conclusion:

Tax on SIP investments depends on the underlying securities and is taxed as per the current taxation rules on equity and non-equity investments. However, in case of SIP, every instalment is considered as an additional investment.

Consult us to know more.

This blog is purely for educational purpose and not to be treated as an personal advice. Mutual fund investments are subject to market risks, Read all scheme related documents carefully.

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