SIPs of mutual funds have been more popular in recent years as a means of investing and wealth generation for individuals and businesses of all sizes. However, figuring out the SIP tax is the main issue. You should know the buy and sell tax implications of SIP.
Let us learn more about how SIPs work and how they are taxed.
What Are SIPs?
A Systematic Investment Plan, or SIP, is a long-term strategy for investing regularly over time. SIPs are designed for those who want to start investing but aren’t sure how or where to do so. Mutual funds’ Systematic Investment Plans (SIPs) provide a number of different schemes that make it simple for investors to put money into a mutual fund on a regular basis, whether that be monthly, quarterly, or all at once.
With SIPs, even a small amount of money may go a long way. There are parallels to traditional bank deposits. You may also automate the SIP payments using an autopay facility. Your monthly deposits will be deducted automatically from your bank accounts, relieving you of the burden of remembering to make them.
How Are SIPs Taxed?
SIPs are taxed according to where it invests. For taxation purposes, mutual funds are divided into equity and debt funds. Both of them have different taxation rules.
Equity Funds Taxation
Depending on the length of time that equity mutual funds are held, investors may be subject to one of two different tax regimes. The first is known as the Long-Term Capital Gain tax (LTCG), while the second is known as the Short-Term Capital Gain tax (STCG).
Long-term capital gain taxation applies to equity funds that have been held for longer than a year. The current long-term capital gains tax rate is 10%, and indexation is not included. Gains of up to RS. 1 lakh are not taxed.
A short-term capital gain tax is imposed on equity funds that have been held for less than a year. The reassessed tax rate for STCG is fifteen percent (15%).
Debt Funds Taxation
Both the Long-Term Capital Gain tax (LTCG) and the Short-Term Capital Gain tax are applicable to debt mutual funds, since both kinds of taxes are considered to be forms of capital gain.
Long-term capital gain is the kind of gain that is taxed on debt funds if they are kept for longer than three years. The long-term capital gains tax rate is now 20%, and it is indexable.
Short-term capital gain is the kind of gain that applies to debt funds that have been held for less than three years. STCG income from debt mutual funds is subject to taxation based on the individual investor’s tax bracket. Therefore, the rate of taxation that will be applied to debt mutual funds will be the same as the rate that applies to the taxpayer’s income tax bracket.
Taxation When Investing Through SIPs
Taking into account the period of each SIP separately will allow you to compute the returns from your mutual funds.
Let’s assume you began making SIP investments in a mutual debt fund in January 2018. By selecting the SIP option, you have decided to invest in the fund every month until January 2022. You withdrew all of your fund’s units via a redemption to reach your financial objective.
You will be subject to long-term capital gains tax if you cash out your SIP between January 2018 and January 2019. With the indexation advantage, your tax rate will be 20%. However, if you hold onto your SIPs through January 1, 2019, you will be subject to a short-term capital gains tax.
Bottomline
Taxes have a reputation for being complicated. Particularly in the realm of investing, there may be several sets of regulations, terms, profits, tax rates, deductions, and exemptions that apply to various investment vehicles. Knowing the ins and outs of these taxes can help you minimize your income taxes and maximize your returns.