Mutual fund SIPs can be excellent for meeting your financial goals with regular investing. They can be of various frequencies, like daily, monthly, or quarterly. Also, their redemption can be either together for a fund or through a Systematic Withdrawal Plan (SWP). But is there any tax on SIP returns? And more importantly, how do you calculate the tax on SIP returns? 

Let’s learn about income tax on SIP returns and their calculation for different mutual fund types. 

How Are Equity Mutual Fund Returns Taxed? 

It can be easier to understand tax on SIP returns with the help of an example. 

Suppose you have invested in an Equity Linked Savings Scheme (ELSS) to save taxes on your income. So, considering the maturity period of ELSS funds, your SIP investments would mature in three years. With mutual funds, SIPs mature per the FIFO approach (first in, first out). 

If you wish to redeem these SIPs as and when they mature, the SIP amount will be transferred to your registered bank account after redemption. Their gains will be added to your income as ‘income from other sources.’  Here, you will not incur income tax on SIP returns if they are below ₹1 lakh for a financial year.   

This rule will apply to long-term and short-term capital gains from equity-based mutual funds. 

STCG & LTCG on SIP Returns

Taxes on mutual funds depend on the period for which you have held them. According to the investment horizon, short-term capital gains (STCG) or long-term capital gains (LTCG) would apply. 

This period can be different for different types of mutual funds. Let’s look at them in detail. 

Capital Gains Tax Rate For Different Mutual Fund Types

Capital gains for different types of mutual funds can be different. Let’s understand this with an example. 

Say you invested in an equity mutual fund and invested for a period of 11 months. Now that your investment tenure was less than 12 months, your gains will be considered short-term capital gains. 

In equity mutual funds, profits up to ₹1 lakh are exempted from taxes for short-term capital gains. A tax rate of 15 per cent would be applicable for any gains above that. 

For the same fund, if your investment tenure has been 13 months or more, you would be taxed for long-term capital appreciation. This is zero for profits up to  ₹1 lakh and 10 per cent thereafter.

How is Taxation Different for Debt & Other Mutual Funds?

The investment horizon to earn long-term capital gains is higher for debt funds than their equity counterparts. 

Gains from an investment in a debt-based mutual fund for less than three years will have short-term capital appreciation. These gains will be added to your income and taxed according to your income tax slab. 

If you have redeemed them after three years, you will incur a long-term capital gains tax of 20 per cent plus indexation (making it 20.8 per cent). 

To calculate your final tax liability for short-term capital gains, you can consider the cost of deductibles like brokerage charges, if applicable. These deductibles can be used during the redemption of the security. 

To reduce your tax burden, you can consider indexation, deductibles, and exemptions for long-term capital gains. You can consider the Cost of Inflation Index (CII) to calculate indexation on your capital gains. Also, you can get tax exemptions by reinvesting these gains, as applicable under section 54F of the income tax act. 

The Fi Advantage

Investing in your chosen mutual fund scheme is now quick, smart, and simple. The Fi app allows you to invest in mutual funds at your preferred frequency. If monthly SIPs are not your thing, you can invest daily with the daily deeds feature in the Fi app. Instruct the app to deduct a certain amount at the end of each day and invest in your chosen mutual fund scheme.  

Summary 

Taxes can be complex. Especially when it comes to investing, there can be several rules, tenures, gains, tax rates, deductibles, and exemptions that apply to different investment types. Understanding the nuances of these taxes can help you lower your tax liability and get the most out of your investments. 

Frequently Asked Questions

1. Do we have to pay tax on SIPs in India?

Taxes are applicable on the redemption of an investment. You can incur a short-term or long-term capital gains tax on mutual fund returns when you redeem your units. These taxes apply similarly to SIP and lump sum investments.

2. Are returns from a mutual fund investment taxable?

Yes, returns from mutual fund investments are taxable. But the tax rates on these investments are different for different mutual funds. Also, the tax rate differs for short-term and long-term capital gains even within a single type of mutual fund.

3.How much tax do you pay on mutual fund withdrawal?

15% is the tax levied on Mutual fund withdrawals regardless of the your Income Tax bracket

5. How can I avoid tax on mutual fund redemption?

If your Long-Term Capital Gains from Equity Mutual Funds is less than or equal to Rs.1 lakh in a financial year, you do not have to pay any Capital Gains Tax on your returns

Curious? Read on

1. How to get tax benefits or exemptions by investing in Mutual Funds
2. How to reduce tax on debt mutual fund returns with indexation
3. Tax on Mutual Funds : What is it and how does it work
4. What are hybrid funds - Benefits, taxation, and how to invest