How to do Capital gain tax calculation on SIP investments in Mutual Funds?

Calculate Capital Gain Tax on SIP investments
Calculate Capital Gain Tax on SIP investments
Table of Contents

How investors get return on their SIP investments

There are two ways by which SIP investors get returns on their investments.

  1. Dividend income

Dividend income through mutual fund investments is taxable in the hand of investor. Investor is liable to pay taxes on their dividend income. This income is added in the gross income of the investor for taxation purpose. It is taxed on applicable income tax slab rates.

  1. Capital Gain

Capital gain is the amount of profit earned from the sale of a capital asset. It may be mutual fund units, stocks, bonds, real estate etc.

Specifically for mutual funds, it can be defined as profit realized due to the appreciation in the price of the fund units in mutual funds. Capital gains are taxable in the hands of investors.

Classification of Capital Gain tax:

Capital gain is classified in two categories on the basis of holding period of units by an investor.  It is known as Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). Applicable tax rates are different for Short Term Capital Gain and Long Term Capital Gain. Tax rates are also different for Equity oriented SIP schemes and Debt oriented SIP schemes.

 It is shown in the given table.

Fund CategoryShort Term Capital Gains(STCG)
(Holding Period)
Long Term Capital Gains (LTCG) (Holding Period)Applicable tax rate on STCGApplicable tax rate on LTCG
Equity funds12 months or less than 12 monthsOver12 months 15% + cess + surcharge10% + cess + surcharge Rs 1 lakh per year is tax-exempt.
Debt funds36 months or less than 36 monthsOver36 monthsAs per income tax slab rate tax provisions20% + cess + surcharge (With indexation)

Note: Applicable tax rates are subject to change as per the govt. regulations

Taxation on Equity oriented investments:

Funds having its portfolio exposure of 65% and above in equities, It is considered as Equity Fund for taxation purposes. If you redeem your units within 12 months from the date of purchase, it will be treated as Short term capital gain. STCG tax @ of 15% will be applicable on such gains.Overall income corresponding to specific income tax slab category is not considered for STCG taxation of equity-oriented schemes. Cess and Surcharges will be applicable as per the prevailing rate.

If you redeem your SIP units after 12 months from the date of purchase, it will be treated as Long term capital gain. LTCG tax @ of 10% will be applicable on such gains on Equity oriented schemes. Earnings upto Rs1 lakh per year is exempted from tax. Indexation benefit is not given to the investors on such earnings.

Cess and Surcharges will be applicable as per the prevailing rate.

Taxation on Debt oriented investments:

All investments in mutual fund units other than ‘Equity Funds’ as defined in previous para areconsidered as Debt Fund for taxation purposes. If you redeem your units within 36 months from the date of purchase, it will be treated as Short term capital gain. This earning will be added in your overall income and taxed on the applicable income tax rate corresponding to specific income tax slab category you fall in.

If you redeem your SIP units after 36 months from the date of purchase, it will be treated as Long term capital gain. LTCG tax @ of 20% will be applicable on such gains with indexation benefits.

Cess and Surcharges will be applicable as per the prevailing rate.

How Capital gain tax calculation on SIP investments are done:

Equity Investment

SIP is a periodical investment of chosen frequency.With every frequency of investment in a selected scheme you purchase a certain number of fund units.When you redeem the scheme units, the redemption is processed on a first-in-first-out basis.This means that the unit you purchased first will be the made available first for redemption processing and the same sequence will continue. It is called the FIFO method.

Let us make some assumptions to understand it better. Assume you invested in an equity fund via monthly SIP mode and invested a sum of Rs 10000 per month for one year. Due to any reason you decided to discontinue the investment and applied to redeem all your scheme units after 13 months. In this case, the first units purchased through the first SIP has completed the holding period of 12 months. Therefore, it will come under category of LTCG and the remaining units will come in the category of STCG. Tax calculation on the profit booked will be done as per the tax rates of the LTCG and STCG. If the amount of LTCG is less than Rs 1 lakh on equity oriented schemes, no tax will be levied. short-term capital gains on the units purchased via SIP from the second month onwards will be taxed at a flat rate of 15% irrespective of your tax slab.

Example of tax calculation on SIP for equity investment

An example of Capital gain tax calculation on SIP investments is given to make the concept clear to the readers:

Ramesh has started investing in an equity mutual fund scheme through SIP in the month of July 2019 for one year. He started investing Rs 10000 on monthly periodicity and invested till June 2020. In the month of July 2020 he sold all his units at an NAV of 130. The capital gain will be calculated month wise because the sip investment Ramesh had made in July 2019 will complete the holding period of 12 months in July 2020 and therefore fall in LTCG category.In other words, each SIP investment instalment will be treated as a separate purchase for the purpose of taxation.

Tax will be calculated @ of 10% with cess and surcharge as per LTCG taxation process. Since Long term capital gain up to Rs 1 lakh  is exempted from tax liability, this earning of Rs 3000 will not attract any tax. If this amount exceeds the exemption limit i.e. Rs 1 lakh, LTCG tax @ 10% with cess and surcharge will be applicable on the amount above Rs 1 lakh. Indexation benefits are not applicable for equity LTCG tax calculations.

SIP investments made from August 2019 to June 2020 will fall under category of Short term capital gain since the holding period is less than 12 months. The total STCG for this period is Rs 37131.09.In the month of May 2020 and June 2020, there is a capital loss of Rs 1333.20 and Rs 1875. It will be set off with the Short term capital gain. Now on STCG of Rs 37131.09 the tax will be calculated @ 15% plus cess and surcharge. It will be Rs 5570 plus applicable cess and surcharge.

Monthof SIP investmentAmount investedNAVNo. of unitsSelling priceGain/LossTotal Gain/LossTax category
July 201910000100100130303000LTCG
Aug 20191000010595.23130252380.75STCG
Sep 20191000011090.90130201818STCG
Oct 20191000012083.3313010833.30STCG
Nov 201910000100100130303000STCG
Dec 20191000010298.03130282744.84STCG
Jan 20201000010199130292871STCG
Feb 20201000090111.11130404444.44STCG
March 20201000080125130506250STCG
April 202010000502001308016000STCG
May 20201000015066.66130-20-1333.20STCG
June 20201000016062.5130-30-1875STCG
Net STCG37134.13STCG

Debt investment

As we have already discussed, Calculation of capital gain tax on debt investment is also based on the holding period of the units. Investment in debt funds via SIP is also calculated by the same method we have discussed earlier in the Equity investment via SIP. For Debt Funds ,the holding period is different for categorization of Short Term Capital Gain and Long Term Capital Gain.

Fund CategoryShort Term Capital Gains(STCG)Long Term Capital Gains (LTCG)Applicable tax rate on STCGApplicable tax rate on LTCG
Debt funds36 months or Less than 36 monthsOver36 months As per income tax slab rate applicable to the investor20% + cess + surcharge (With indexation benefits)

 

If you redeem your units within 36 months from the date of purchase, it will be treated as Short term capital gain. This earning will be added in your overall income and taxed on the applicable income tax rate corresponding to specific income tax slab category you fall in.

If you redeem your SIP units after 36 months from the date of purchase, it will be treated as Long term capital gain. LTCG tax @ of 20% will be applicable on such gains with indexation benefits.

Cess and Surcharges will be applicable as per the prevailing rate.

Suppose you started investing in a debt fund on July 2017 via SIP of Rs 10000 per month and continued it till December 2020. You requested for redemption of all the units in Jan 2021.

Whatever profits you have booked on your SIP investment from July 2017 to Dec 2017 will fall under category of Long Term Capital Gain (LTCG) and taxed @ 20% + cess + surcharge with indexation benefits. It is because the holding period of the units exceeded 36 months. Since it is a monthly investment through SIP all the calculations were done on month wise gain or loss basis. (As we have done in earlier example of equity investment via SIP)

The Profit booked on monthly investments from Jan 2018 to Dec 2020 will fall under category of Short term capital Gain (STCG) and added to the overall income of the investor for taxation according to the income tax slab the investor falls in.

What is Indexation?

Indexation is the technique through which you adjust the purchase price of an asset for inflation during the time interval of purchase andsale of an asset.It is a tool to counter the inflation effect which provides benefit of bringing down the tax liability.

Government of India issues a Cost Inflation Index (CII) to reflect the inflation every year. This index number is used to calculate the inflation adjusted value of purchase of an asset.

How Indexation is done in calculating the LTCG in debt investment through SIP?

Indexation Formula
 
Indexed cost of acquisition =                                                    

(Cost of acquisition) x (CII of the year of sale of capital asset)
                               CII of the year of acquisition

Month of SIP investmentAmount investedNAVNo. of unitsAdjusted NAV at the time of Sale*Selling priceGain/LossTotal Gain/LossTax category
July 201710000100100110.6613019.341934LTCG
Aug 20171000010595.23116.1913013.811315.12LTCG
Sep 201710000110
90.90121.721308.28752.65LTCG
Oct 20171000012083.33132.79130-2.79-232.49LTCG
Nov 201710000100100110.6613019.341934LTCG
Dec20171000010298.03112.8813017.121678.27LTCG
TOTAL7381.55

*Note: Assuming CII for FY 2017-18 was 272 and for FY 2020-21 it was 301.

In the same fashion Gains/Loss in respect of units purchased from January 2018 onwards will be calculated but without giving any benefit of indexation. These will be categorized under Short Term capital gains and will be taxed accordingly as per the slab rates of tax applicable to that specific investor.

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