Taxation for redemption of SIPs and their tax benefits

SIP (Systematic Investment Plan) has become a new mode of investment and creation of wealth for many investors. SIPs are systematic plans for investing in Mutual funds, but instead of investing an amount in lumpsum, people prefer to invest in periodic intervals. This investment habit of people investing in SIPs is also beneficial for them while planning their taxes. Many tax benefits are declared for investing a particular amount in certain specified funds. In this article, we discuss the tax implications of investing in SIPs and tax liability for their redemption.

Taxation of SIPs:
Taxation of SIP is not exclusively discussed in the income tax provisions however, the taxation provisions for mutual funds only are applied in this situation. Not all the investments made in SIPs are tax free, some of them do not provide any tax benefits. SIPs are done on a period installments and hence their taxability also depends upon their holding period. For tax purposes each instalment is considered as a fresh investment. Accordingly, the holding period for each instalment is calculated.

Taxation of SIPs depend upon the type of funds and period of holding as well. For calculation purposes let us divide types of SIPs and understand taxability in each one of them.

• Equity-oriented funds: Equity funds refer to mutual funds in which more than 65% of the total fund value is invested in the equity shares of companies. Therefore redemption of such SIPs will attract capital gains taxes. Depending upon the holding period they will liable to Short term or Long term capital gain taxes.
• Debt-oriented funds: Capital gains from SIP investments in debt funds made after April 1, 2023 are classified as STCG for taxation purposes irrespective of the holding period. Normal tax slab rates applies to them however, long term capital gains are subject to LTCG @20% without indexation.
• ELSS(Equity Linked Saving Scheme): These are equity funds only with Lock-in period provisions. The lock-in time of the ELSS scheme is three years, and the income you earn at the end of the three-year tenure is known as Long Term Capital Gain which is taxed at 10% in excess of such income exceeding Rs.1 Lakh. Dividend scheme, growth scheme and dividend re-investment scheme are certain types of ELSS. 
• Hybrid Funds: The rate of taxation of capital gains on hybrid or balanced funds is dependent on the equity exposure of the portfolio. If the equity exposure exceeds 65%, then the fund scheme is taxed like an equity fund, if not then the rules of taxation of debt funds apply.

Tax benefits of investing in SIPs:
Following are tax benefits for investing in SIPs:

• Section 80 Deduction upto Rs.1.5Lakhs if invested in tax saving ELSS.
• LTCG from redemption of such SIPs is taxable @10% if gain amount exceeds Rs. 1 Lakh
• ELSS investments, withdrawal and redemption on maturity are entirely tax free.
• It offers a diverse range of portfolio for managing finances through investing in equity, debts or gold etc. so as to minimise the risk of volatility of equity markets.
• Each SIP investment is treated as a different investment at the time of redemption and hence benefit of the averaging can be enjoyed by the investor while planning redemption.

Conclusion:
SIPs offers wide range of investment opportunities including investment in hybrid funds thereby minimizing the risk of volatility and safeguarding substantial portions of the money. Taxation of SIPs is done as per mutual funds provisions however depending upon the type i.e. equity or debt and as per period holding the tax rates may differ. ELSS option offers good amount of exemption benefits to the investors.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.