How is an SIP calculated in income tax and how to save maximum on SIP returns?


Systematic investment plans, or SIPs, have become quite popular among investors who are looking to build a corpus while trying to beat inflation. SIPs are one of the useful investment tools since you don’t need to time the market before making the investment.

A mutual fund SIP can be a great way to invest and achieve financial goals consistently. Additionally, you can decide if you want the SIPs to be made daily, monthly, or quarterly.

Factors that determine the tax on mutual funds


A dividend is a portion of the cumulative profit mutual fund companies split among the scheme’s investors. You are in no way forced to sell the assets due to it.

Holding time

According to Indian income tax laws, if you keep your investment for a long time, you will only have to pay a small amount of tax. The holding term affects the tax rate that must be paid on your capital gains. You are required to pay less tax the longer your holding period is.

Fund types

Two different kinds of mutual funds are subject to taxes. With the help of SIPs, you can invest in equity or debt mutual funds.

Capital gains

Profits are made when you sell the capital assets for more money than originally paid for them.

Taxation on SIPs

Each SIP instalment allows you to buy a particular amount of mutual fund units. First-in, first-out procedures are followed while handling these redemptions. Think about investing in an equity fund through a one-year SIP and then electing to invest the full amount after 13 months.

The first units purchased via the SIP are held for a long time, allowing you to realise long-term capital gains. You are exempt from paying tax on long-term capital gains less than Rs. 1 lakh.

However, starting in the second month, you realise short-term capital gains on the shares acquired through SIPs. No matter what income tax bracket you are in, these gains are taxable at a flat rate of 15%. It would help if you covered the applicable cess and surcharge for it.

Is the return from a mutual fund investment taxable?

Yes, the returns on investments in mutual funds are taxed. However, the tax rates for these investments vary depending on the mutual fund. Long-term capital gains and short-term capital gains are taxed at different rates, even within the same types of mutual fund.

For various mutual funds, the investment duration is also taken into account differently. For an equity mutual fund, the short-term capital gains would be applicable for up to a year of investment. Long-term capital gains tax will be due if you have held your investments for longer than a year. On the other hand, other mutual funds experience short-term gains in as little as three years and long-term returns for an investment period longer than that.

Final note

Taxes may be challenging. Several regulations, tenures, tax rates, gains, deductions, and exemptions apply to various investment kinds, particularly when it comes to investing. You can reduce your tax obligation and get the most out of your investments by grasping the subtleties of these taxes.

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