What taxes apply on returns made from SIP mutual fund investing | Fi Money (2024)

You’ve surely heard of Systematic Investment Plans (SIPs) - they've become increasingly popular among investors because they're easy to use and have the potential for wealth accumulation. SIPs are offered by mutual funds, which provide diversified portfolios managed by professionals. This makes mutual fund SIPs an excellent choice for regular investing to meet your financial goals. Just keep in mind that there are tax implications associated with SIPs that you should consider.

What is an SIP?

Instead of investing all at once, you can invest in mutual funds at regular intervals. These intervals are called SIPs. This approach has one main advantage: when investing in one go, you cannot be sure if you're getting the best price for the mutual fund units. Instead, if you invest in installments over a period of time (days, weeks, or even months), you are essentially investing the same total amount divided over time. This ensures that the overall price paid for the mutual fund is averaged over the entire investment duration.

How Are Equity Mutual Fund Returns Taxed?

• Dividends Dividends are generally taxable as per the individual's income tax slab rates.
• Short-term Capital Gains Short-term capital gains are usually taxed at a higher rate than long-term gains and are added to your taxable income.
• Long-term Capital Gains Long-term capital gains on equity mutual funds that surpass ₹1 lakh are taxed at a rate of 10% without an indexation advantage.

Here's how you can avail tax exemptions on Equity Mutual Funds.

Taxation on Mutual Funds

Here’s a table containing all the taxation details about different types of mutual funds:

Please note that the tax rates provided here may be subject to change. It's always recommended to consult with a tax professional or refer to the latest tax laws and regulations for accurate and up-to-date information.

About Indexation

This provision is meant to prevent inflation from reducing the value of your assets over time. This benefit is called 'Indexation' and is provided by Income Tax laws. Essentially, you are allowed to adjust the purchase price of your asset based on the rate of inflation notified by the government.

How is Taxation Different for Debt & Other Mutual Funds?

• Debt mutual funds require a longer investment horizon to earn long-term capital gains than equity mutual funds.
• Short-term gains from debt mutual funds are taxed according to the investor's income tax slab.
• Long-term gains from debt mutual funds are taxed at a rate of 20% plus indexation if held for more than three years.
• To calculate the tax liability for short-term gains, consider deductibles like brokerage fees during the redemption of the security.
• Indexation, deductibles, and exemptions for long-term gains can help reduce the tax burden. Indexation can be calculated using the Cost of Inflation Index (CII), and tax exemptions are available by reinvesting gains under section 54F of the income tax act.

Income Tax Slabs

Here’s a closer look at the tax rates of different income slabs:

Conclusion

SIPs are a great option for regular investing to meet financial goals. They are easy to use and provide the potential for wealth accumulation. However, it's essential to consider the tax implications of SIPs. Taxes are levied on different types of mutual funds used in SIPs, and the gains made from them determine how much tax is due. It's always recommended to consult with a tax professional or refer to the latest tax laws and regulations for accurate and up-to-date information.

Investing in Mutual Funds? Think beyond SIPs

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Frequently Asked Questions

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

Yes, taxes are levied in India on SIPs. The sort of mutual funds used in SIPs and the gains made from them determine how much tax is due.

2. Are returns from a mutual fund investment taxable?

Yes, returns from mutual fund investments are taxable. But the tax rates on these investments vary across different mutual funds.

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

In India, a flat tax rate of 15% is levied on the withdrawal of mutual fund investments, regardless of an individual's income tax bracket. This tax applies to both equity and debt mutual funds.

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

In India, if your long-term capital gains from equity mutual funds are below ₹1 lakh, you don't have to pay any taxes on them. However, if they exceed ₹1 lakh in a single year, you would have to pay a 10% tax on the gains that are above the threshold.