Tax obligations for SIP


#1

I am confused as to what my tax obligation is for mutual fund investment made by me during the financial year using a systematic investment plan. Please help.


#2

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.


#3

Hi,

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 taxed at 10% and are treated as long-term capital gains (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%.

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Cheers,
BB Expert