SIP: Do you have to pay tax on SIPs as well? Is Capital Gains Tax applicable here too?
This year, the budget session is starting on January 28th, and the country's budget will be presented on February 1st. This day falls on a Sunday. Many speculations are being made regarding the budget. It is believed that the government might introduce something new for the common man in this budget. Announcements regarding taxes are also expected. But, amidst all this, are you aware that you have to pay tax on the investments you make through SIPs? Since capital gains tax is levied on shareholdings, does the same tax apply here as well? Let's understand this in detail.
Millions of people who invest in mutual funds consider SIPs a safe and long-term option. But when it comes to taxes, the answer is yes, SIPs are also subject to tax, but it is crucial to understand the method and timing of this tax. First, it's important to know that SIP is not a separate investment, but a method of regular investment in mutual funds. Therefore, tax rules apply based on the type of fund and the holding period. The important point is that no tax is levied while making SIP investments; tax is levied only when you sell your units, i.e., at the time of redemption.
Tax on SIPs in Equity Mutual Funds
If the SIP is made in Equity or Equity-Oriented Mutual Funds, the tax is understood in two parts. If each SIP installment is sold after holding it for more than 1 year, it is considered a long-term capital gain. Under the current rules, LTCG up to Rs. 1.25 lakh in a financial year is tax-free. A 12.5% tax will be levied on profits exceeding this amount. This tax is levied at a flat rate and does not offer the benefit of indexation.
If SIP units are sold before 1 year, it is considered a short-term capital gain and is taxed at 20%. It is also important to note that each SIP installment is considered a separate purchase. This means that the holding period of each installment is calculated separately, and the tax calculation is also done on that basis.
Tax on Debt Mutual Fund SIPs
The tax rules for Debt Mutual Fund SIPs are different. Debt funds purchased after April 2023 no longer qualify for the separate long-term capital gains (LTCG) benefit. Regardless of the investment duration, the entire profit is added to your income and taxed according to your income tax slab. SIPs are not tax-free investments, but the tax burden can be reduced with proper planning. Equity SIPs, when held for the long term, offer a tax-free LTCG benefit of up to ₹1.25 lakh, making them tax-efficient. Understanding the tax rules before investing should be a crucial part of your return strategy.
Disclaimer: This content has been sourced and edited from TV9. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
