Are returns from SIP taxable?

Investing your money can help it grow in value and beat inflation. But a major part of your hard-earned profits can also go into tax and reduce your earnings. This is why it is important to determine the taxability of each investment before putting in any of your hard-earned money. Mutual funds can be a suitable investment option for most people but are the returns from a SIP taxable? Read on to find out.

SIP taxHow can tax saving SIP options help you?

Investments in mutual funds online can get you a tax exemption under Section 80C of the Income Tax Act, 1961 of up to Rs. 1.5 lakhs. So, you can use this option to reduce your tax liability in a financial year.

How are you taxed when you invest in mutual funds?

When you invest in a mutual fund, your returns can be classified as Long-Term Capital Gains (LTCG) or Short-Term Capital Gains (STCG). The criteria to ascertain among them can differ based on the duration and type of fund. For instance,

  • Equity funds held for

< 12 months are categorized as STCG

> 12 months are categorized as LTCG

  • Debt funds held for

< 36 months are categorized as STCG

> 36 months are categorized as LTCG

Taxation of STCG on debt mutual funds

It is added to your gross income for the year and taxed according to the applicable income tax slab you fall under.

Taxation of LTCG on debt mutual funds

It is taxed at a flat rate of 20% (plus cess and surcharge) after indexation.

Taxation of STCG on equity mutual funds

It is taxed at a flat rate of 15% (plus cess and surcharge).

Taxation of LTCG on equity mutual funds

LTCG on equity funds up to a limit of Rs. 1 lakh in a year are tax exempt. Any long-term capital gains beyond this are taxed at a flat rate of 10% (plus cess and surcharge).

Taxation of capital gains on a SIP

  • LTCG through SIPs are not taxed if they are below the limit of Rs. 1 lakh. However, anything above this limit will be taxed as per the existing IT slabs.
  • STCG through SIPs are taxed at a flat rate of 15% irrespective of the tax slab.

Mutual funds can be a great way to build your savings corpus. However, you must be well aware of how they are taxed in order to make better decisions. If you want to start investing, check out Moneyfy app to simplify investing for you. You should also invest in a good financial planner or tax consultant so that you can invest in the right tax saving SIPs.