Tax Calculation on SIP Mutual Fund: Due to the volatility of the market, many investors are afraid of investing directly in the stock market. Systematic Investment Plan (SIP) is a better mutual fund plan for such people. It facilitates regular investment of mutual funds, thereby reducing the financial burden on the investors and they can get better returns in the long run. However, before starting investing in this, one must definitely assess the taxability so that your returns can be maximized. The amount of tax to be paid on investment in SIP depends on in whom the capital is invested, in equity funds or debt funds or both. The dividend paid by the mutual fund is added to the total income and the tax is calculated based on the income tax slab.
This is how tax liability is created on equity funds
If you invest in equity fund units under SIP and redeem it within a year, then it will be taxed on the basis of short term capital gain. Tax will have to be paid on this at a flat rate of 15 percent. However, if you keep the investment for more than one year, then long term capital gains will be available on this investment. If there is a long-term capital gain of up to Rs 1 lakh annually, then the facility of tax exemption will be available on it, however, if the gain is more than this, tax will be calculated at the rate of 10 percent and will not get the benefit of indexation.
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The units which are bought first under SIP are withdrawn first and tax is calculated on the gains as given above. This means that if you keep any investment in SIP equity fund for two years and redeem this entire investment, then the investment made in the first year will be taxed on the basis of long-term capital gain and short-term on the investment made in the second year. Tax will be calculated on term basis.
Tax Liability on Debt Funds
If you are buying units of debt funds, then redeeming it within three years generates short term capital gains. These gains are added to the income and then the tax liability will be created on the basis of the income tax slab under which it will fall. Redeemed after three years generates long-term capital gains and is liable to tax at the rate of 20 per cent with the benefit of indexation.
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Like equity funds, the units that are bought first are withdrawn first and the tax is calculated on the gains as given above. This means that if you keep any investment in SIP debt fund for four years and redeem this entire investment, then the investment made in the first three years will be taxed on the basis of long-term capital gains and on the investment of the fourth year. Tax will be calculated on short term basis.
This is how tax liability will be made on hybrid funds
If you are buying mixed units of equity and debt funds and more than 65 per cent of your investment is being invested in equity funds, then tax will be calculated as equity fund. If less than 65 percent investment is in equity fund, then tax will be calculated as debt fund.