Are SIP returns taxable?


There isn’t a better investment option than mutual funds especially if you keep diversification in mind. What mutual fund houses do is that they collect money from investors and invest the capital raised in a diversified portfolio of securities to achieve a common investment objective. Mutual funds do hold the potential to help you target your life’s financial goals, but it is essential that you continue investing for the long run. Mutual funds are considered tax friendly too because of the several benefits they offer. For investors who fall under the highest tax slab, investments in bank fixed deposits hamper their returns are added to their overall income and tax deduction happens depending on the tax bracket they fall under.

However, investments in mutual funds are way more feasible as they provide flexibility. To understand how mutual funds are taxed, investors should first understand how mutual funds offer returns. There are two ways that mutual fund houses offer returns to investors – dividends and capital gains. Dividends are distributed by company to investors when their profits are surplus. Investors receive dividends in quantum with the number of units held. Capital gains are returns earned by investors through systematic long term investing in a particular mutual fund scheme. A capital gain is the additional income which an investor earns by investing in mutual funds. The selling price of the unit of a mutual fund must be greater than buying price for investors to derive capital gains. The appreciation value earned by investors either in the form of dividends or capital gains are taxable.

What is SIP?

Systematic Investment Plan, often abbreviated as SIP, is an investment tool that gives mutual fund investors an opportunity to invest small amounts at regular intervals (typically every month). An investor has to be KYC compliant to start a monthly SIP in mutual funds. All an investor has to do is decide on the monthly SIP sum that they wish to invest, select a mutual fund scheme which might help them target their goals and instruct their bank to allow auto debit. After this, every month on a fixed date the predetermined SIP sum is debited from the investor’s saving account. In quantum with the SIP sum and depending on the scheme’s existing NAV, mutual fund investors receive units. Investors can also refer to SIP calculator, a free online tool that draws a rough estimate on the returns that you will be earning at the end of your investment journey.

Are returns from SIP taxable?

SIPs are brought into effect so that every individual should be able to invest in mutual funds. Some SIPs are as low as Rs. 500 per month, thus giving investors an opportunity to earn capital appreciation through systematic investing. Investors should understand how capital gains are taxed to determine how much their SIP returns will be taxed. Suppose you invest Rs. 10,000 per month in a mutual fund scheme for 12 months and decide to redeem the returns earned in the 13th month. You will have accumulated Rs. 1.2 lakhs plus whatever interest that you earned over the course of 12 months. Every month you receive units depending on the SIP sum but only the very first units purchased will be eligible fore long term capital gains tax. The rest of the units will be taxed for short term. Currently, for SIP gains received through equity mutual fund investments an LTCG tax stands at 10% for gains exceeding Rs. 1 lakh and STCG tax stands at 15 % irrespective of what tax slab you fall under.

Investors should also understand that apart from tax, they also have to pay expense ratio to the fund house. To ensure that your gains aren’t affected by tax or expense ratio invest for a minimum investment horizon of 7 to 10 years.

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