Taxation of Mutual Fund SIP

Arjun (Fictional Character): Krishna, nowadays more and more people are making investments in mutual funds through SIPs?

Krishna(Fictional Character): Arjuna, SIPs i.e., Systematic investment plans are a convenient method of investing in mutual funds in which the investor can invest small amounts periodically. Investors can choose the frequency of their SIP investment as weekly, monthly, quarterly, annually.

Arjun (Fictional Character): Krishna, whether any deduction is available in income tax for the investment made in SIPs?

Krishna (Fictional Character): Arjuna, the investor can claim a deduction up to Rs.1,50,000/- u/s 80C for the investment made in SIP. But the deduction is available only if the SIP is of an ELSS mutual fund i.e., Equity Linked Savings Scheme Mutual Fund. Also, if the investor has already made other investments eligible for deduction u/s 80C up to Rs.1,50,000/-, then there will be no extra benefit from investment in SIP of an ELSS fund.

Arjun (Fictional Character): Krishna, please explain the taxation of capital gains from these SIPs?

Krishna (Fictional Character): Arjuna, The taxation of capital gain depends on the type of mutual fund and the holding period. If a SIP of an equity fund is held for less than 12 months, there will be short-term capital gain taxable at 15%. But if a SIP of an equity fund is held for 12 or more months, then there will be long term capital gain taxable at 10% in excess of Rs.1,00,000/-.

Arjun (Fictional Character): Krishna, please explain the taxation of capital gains from debt fund SIPs?

Krishna (Fictional Character): Arjuna, If the SIP of a debt fund is held for less than 36 months there will be short-term capital gain taxable at the slab rate applicable to the taxpayer. But if a SIP of a debt fund is held for 36 or more months, then there will be long-term capital gain taxable at 20% after indexation of cost.

There are some hybrid funds also which are taxable based on the equity exposure of the fund. If the equity exposure of the fund exceeds 65%, then it is taxable like an equity fund otherwise the tax rates applicable to the debt fund apply as given above.

Arjun (Fictional Character): Krishna, what should the taxpayer learn from this?

Krishna(Fictional Character): Arjuna, With the help of the SIPs, taxpayers get to invest smaller amount periodically instead of the lump sum amount at once which install a sense of financial discipline and a large amount of money is not required to start investing. A taxpayer should keep in mind that the longer the duration of SIP, is more tax-efficient. Taxpayers must invest in SIPs having objectives and risk levels matching their profile.