Mutual fund schemes are considered as an ideal investment instrument for people who wish to invest their income but want to start small for higher returns. Mutual funds help you invest in the stock market while allowing diversification in your portfolio. The best part about mutual funds investments is, it is managed by expert professionals. So even if you are not a stock market expert yourself, your investment is taken care of by experts.

Your returns are also based on the taxation of your investments. Do you know how SIP investment is taxed? While you might know the different ways of earning money through mutual funds, you should understand its taxation aspect as well.

We are here for your help. Here is a beginner’s guide to taxation of SIP investments.

What are SIP investments?

SIP or Systematic Investment Plan is one of the two ways in which you can invest in mutual funds, the other one being the lump sum method. In the SIP method, you can invest a small amount of your income in the mutual fund scheme periodically. You can choose the investment frequency, be it bi-weekly, monthly, quarterly, bi-annually or yearly.

You can earn income from mutual funds in two ways, through dividend and capital gain. The dividends you earn through the mutual funds are added to your total income and taxed accordingly.

The other way is capital gain. Capital gain is the profit you earn when the sale price of the mutual fund unit is more than the price you purchased the unit for. Capital gain is divided into long-term capital gain (LTCG) and short-term capital gain (STCG). 

Your capital gain taxation is dependent upon the holding period of the mutual fund, i.e. the duration between the purchase and sale of fund units. If you hold the equity mutual fund for less than 12 months, it is called STCG Whereas a mutual fund held for more than 12 months is called LTCG.

Similarly, debt mutual funds held for less than 36 months fall under STCG and debt funds held for more than 36 months are classified as LTCG.

The taxation of mutual funds from capital gain are explained in the below table.

Fund type Short term capital gain Long term capital gain
Equity mutual funds 15% Upto 1 lakhs a year, no tax More than 1 lakhs, 10%
Debt mutual funds As per your slab rate 20%
Hybrid mutual fund If your portfolio is invested in debt for more than 65%, it would be equity and taxed as equity mutual funds. If less than 65%, as debt funds. 

Restricting yourself to asking questions like what is a mutual fund and how to invest in sip is not enough. It is important that you gather adequate knowledge about the taxation aspect of your mutual fund investments earning too. It will help you in effective financial planning by ascertaining your actual returns. So while you gather knowledge about the best mutual funds to invest in, learn about its tax calculation too. Happy investing!

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