I am confused as to what my tax obligation is for mutual fund investment made by me during last financial year using a systematic investment plan. Please help.
Equity based mutual funds which are held for more than one year come under long term capital gains. Since as long term capital gain tax obligation for mutual fund units held by any investor for more than one year is nil, the effective tax obligation is zero.
The 12 month period has to be calculated from the date of investment for each unit. This is the reason that Tax calculations for mutual funds using a systematic investment plan can be complicated for the average investor
To make is simple, you must consider each monthly investment or each SIP as a one unique investment.
In other word each SIP must be considered as one unique investment. Every unit of mutual fund comes with a date of allocation of the net asset value for that particular unit. For example if you have made 50 SIPs, there would be 50 unique blocks in the folio. To get your tax obligation you should check the 12 month limit for each such block. The long term units of those which have been invested for more than 12 months would carry no tax obligations while units with holding period of less than one year would qualify for short term capital gains tax.
I am new to investing and plan to adopt a SIP for my equity investments in the market. How should I choose the best fund for my investments?
Choosing the right mutual fund has a direct correlation between success and failure in the equity market. Before choosing the mutual fund it is imperative to check the various sectors that the fund invests into, the past performance of the funds and its underlying sectors as well as the previous performance of the fund manager managing the mutual fund.
All details of the fund manager and the portfolio of the mutual fund are made available on the website of the concerned mutual fund and in its prospectus. So make sure to do some research on the shortlisted funds and compare their performance before opting for the best possible fund for your investment.
The taxation of SIP investments depends on the nature and tenure of the investment. The tax treatment of equities, debt, or a mix of both will vary. While equity Mutual Funds are the most tax-friendly ones, debt funds attract tax on both short and long-term returns. A Mutual Fund is treated like an equity scheme, from a tax point of view, only when more than 65% of the total portfolio is invested in equities.
In case of SIPs in equity Mutual Funds, the returns that you earn after one year of investment are exempted from taxes and are treated as a long-term capital gain (LTCG). The profit booked before the completion of one year is treated as a short-term capital gain (STCG) and is taxed at 15%.
If a debt Mutual Fund SIP is held for more than three years, the returns are treated as a long-term capital gain. Profit earned in less than three years is treated as a short-term capital gain. While the LTCG for debt funds is taxed at 20% with indexation benefit, the STCG is taxed as per the respective Income Tax slab rate of the investor.
Each SIP instalment you invest will mature for LTCG on the completion of one and three years from the date of investment for equity and debt-oriented schemes respectively. The tenure is ascertained on the day of redemption.
The tax structure of a hybrid fund depends on whether it is equity-oriented (with more than 65% investment in equities) or debt-oriented (less than 65% invested in debt). Read the terms and conditions carefully to find out whether it qualifies as an equity or a debt scheme.
In case you have opted for the dividend option, such incomes don’t get taxed in the hands of the investors in equity funds. For debt funds, the taxation rate for dividends is 28.84%.
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.
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There are different kinds of Mutual Funds and you choose the one which best suits your needs. You then invest in the Mutual Fund through SIP, either directly with an AMC or through an online Mutual Fund aggregator such as BankBazaar.
Select Mutual Funds depending on your risk appetite, financial goals and time of investment. For example, if you have a high risk appetite and are investing for your retirement, you can go for equity Mutual Funds or sector specific Mutual Funds.
If you are risk-averse, invest in a liquid Mutual Fund which is considered safer than other debt funds. These funds invest in short-term fixed-income securities such as certificates of deposit and government bonds. If you are a risk taker, start an SIP in equity funds where you get higher returns for higher risk. These funds invest in stocks. Stay invested for the long term to get profits. You could also consider an SIP in balanced funds, also called hybrid funds, which invest in a mix of stocks and fixed-income securities if you like to take medium risks.
If you find this too confusing, take the help of a financial planner who does research (studies market conditions and funds’ past performance). They will help you choose the fund that is right for you.
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