A Systematic Investment Plan (SIP) is a favourite among Indian investors. It’s flexible, encourages disciplined investing, and has the potential to generate long-term wealth. But while most people focus on returns, taxation is often overlooked. And that can be a costly mistake.
Understanding mutual fund taxation in India is essential. Whether you’re investing in equity or debt funds, the tax treatment of your SIP gains can impact your final returns. And with recent changes in tax laws, knowing how SIPs are taxed can help you plan better and optimise your investments.
So, how are your SIP returns taxed? Let’s break it down, one step at a time.
Why SIP Taxation is Different?
The taxation of SIP investments is different from lump sum investments. That’s because each SIP contribution is considered a fresh investment with its own purchase date.
Let’s say you invest Rs.10,000 every month through a SIP for two years. Each monthly instalment is treated as a separate investment with its own holding period. So, when you decide to redeem, some units may be short-term and others long-term, based on how long they have been held. This staggered investment structure affects how capital gains are taxed.
Taxation of SIP Investments in Equity Mutual Funds
Equity mutual funds invest at least 65% of their assets in stocks. The tax treatment of SIPs in these funds depends on the holding period of each investment.
- Short-Term Capital Gains (STCG): If you sell equity mutual fund units before completing 12 months, the profits will be taxed at 15%.
- Long-Term Capital Gains (LTCG): If you hold the units for more than 12 months, gains above Rs. 1,25,000 are taxed at 10% until 22nd July 2024, and 12.5% thereafter. Gains up to Rs. 1,25,000 remain tax-free.
For example, if you started a SIP in January 2023 and redeemed it in March 2025, some SIP instalments will qualify as long-term, while others will be taxed as short-term capital gains.
Taxation of SIP Investments in Debt Mutual Funds
Debt mutual funds primarily invest in fixed-income instruments like government bonds, corporate debt, and money market securities. The mutual fund taxation in India of SIPs in these funds is different from equity funds.
- Short-Term Capital Gains (STCG): If units are redeemed before 36 months, gains are taxed at the investor’s income tax slab rate.
- Long-Term Capital Gains (LTCG): If units are held for more than 36 months, gains are taxed at 12.5% without indexation for redemptions after 23rd July 2024. Before this, LTCG was taxed at 20% with indexation.
Debt fund taxation underwent a major change after the Finance Act 2023, which removed indexation benefits for mutual funds with less than 35% equity exposure. Starting from FY 2025-26, mutual funds that invest 65% or more in debt instruments will be taxed entirely as short-term capital gains, even if held for the long term. The only change is that indexation benefits will be removed, and LTCG will be taxed at 12.5% without indexation after July 2024.
Dividend Taxation on SIP Investments
Dividends from mutual funds used to be tax-free for investors because fund houses paid Dividend Distribution Tax (DDT). But that changed in April 2020. Now, dividends are added to the total income of the investor and accordingly taxed as per their tax slab rate.
If the total dividend payout in a financial year exceeds Rs. 5,000, a 10% TDS is deducted for resident individuals. For NRIs, TDS is 20%, subject to Double Taxation Avoidance Agreement (DTAA) benefits.
How Different Types of Mutual Funds Are Taxed?
The tax treatment of mutual fund investments depends on their asset allocation. Here’s how SIP taxation varies across different fund categories:
| Fund Type | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) | Dividend Taxation |
| Equity Mutual Funds (more than 65% in equity) | 15% if sold within 12 months | 10% (before 23rd July 2024) and 12.5% (after) above Rs. 1.25 lakh | Taxed as per income slab |
| Debt Mutual Funds (less than 35% in equity) | As per income tax slab (before 36 months) | 12.5% (without indexation) after 36 months | Taxed as per income slab |
| Hybrid Mutual Funds (Balanced Funds) | If equity exposure is above 65%, taxed like equity funds; otherwise, taxed like debt funds | Based on fund type | Taxed as per income slab |
| Gold and International Funds | As per income tax slab (before 36 months) | 12.5% (without indexation) after 36 months | Taxed as per income slab |
SIP Taxation for NRIs
Non-Resident Indians (NRIs) are subject to similar tax rules as resident investors, but with a few additional considerations.
- TDS on Capital Gains: NRIs face TDS at 15% on STCG from equity funds and 10% on LTCG above Rs. 1,25,000. For debt funds, TDS is 30% on STCG and 20% on LTCG.
- DTAA Benefits: NRIs can reduce tax liability if India has a DTAA agreement with their country of residence.
- Higher TDS for Missing PAN: If an NRI doesn’t provide a PAN, TDS can go up to 20%.
How to Reduce Tax on SIP Investments?
While systematic investment plan investments are taxable, there are ways to reduce tax liability.
- Invest in ELSS Funds: Equity-Linked Savings Scheme (ELSS) funds qualify for deductions under Section 80C, allowing investors to claim up to Rs. 1.5 lakh tax deduction per year. ELSS funds, however, come with a three-year lock-in period.
- Plan Redemptions Smartly: Because each SIP instalment is taxed separately, redeeming older investments first helps reduce tax on gains. However, this strategy applies mainly when you’re redeeming investments from equity mutual funds and not from debt or hybrid funds.
- Use LTCG Exemptions: If your total LTCG on equity mutual funds is below Rs. 1,25,000, it remains tax-free.
Final Thoughts
Investing in a systematic investment plan, especially from reputed providers like Axis Max Life Insurance, helps you stay disciplined and benefit from compounding. But taxation plays a key role in how much money you actually take home. Mutual fund tax in India depends on the type of fund, the holding period, and whether you opt for dividend or growth options.
For equity funds, LTCG tax of 10% (or 12.5% from July 2024) applies after one year, while STCG is 15%. Debt funds are taxed differently, with 12.5% LTCG tax (from July 2024) and STCG based on income tax slabs. NRIs face higher TDS, but can use tax treaties to reduce their burden.
To ensure tax-efficient investing, timing redemptions correctly, making use of ELSS funds, and maximising long-term gains are smart strategies. The tax laws keep evolving, so reviewing your portfolio regularly and consulting a financial expert can help make the most of your SIP investments.
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Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making any related decisions.
Tax benefit is subject to change as per prevalent tax laws.