How is tax calculated for equity Mutual fund investments made through SIP?
For investors investing in equity mutual funds using a systematic investment plan or SIP, any returns made after staying invested for a period of more than one year is tax free. However the securities transaction tax is deducted from the total amount received by liquidating the mutual fund holdings.
Tax calculations for mutual funds using a systematic investment plan can be complicated for the average investor. To make is simple, the investor must consider each monthly investment or each SIP as a dedicated investment and one year must be calculated for each SIP. For example if you have made 20 installments or SIPs then you would have 20 unique blocks in the folio.
Calculation of tax must be done by checking the one year or 12 month limit for each such block. The units that have been invested for more than 12 months would carry no tax while units with holding period of less than one year would qualify for short term capital gains tax.
Taxation for Mutual Funds SIP is a little complicated. In case of SIP, every SIP will be considered as an investment. Suppose you invested Rs. 1,000 in January 2017, Rs. 1,000 in February 2017 and so on. The investment that you made in January 2017 will be eligible for long term capital gain benefits only in February 2018, when one year is completed. Your February 2017 investment will be eligible only in March 2018 and so on. So, you will need to wait until every investment has hit the one year mark if you want a lump sum that is tax-free. It becomes even more complicated if you want a SIP in ELSS funds that provide tax benefits under Section 80C of the Income Tax Act. Want to invest in Mutual Funds? Click here.
Get ready with current tax regime in India.