Taxation of amount withdrawn from Systematic Investment Plan (SIP) of Mutual fund

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Taxation of amount withdrawn from Systematic Investment Plan (SIP) of Mutual fund

 

Query]

I have been investing in mutual funds since 2001 by way of Systematic Investment Plan (SIP). I started with Rs. 2,000/- per month in 2001 at the age of 23 years and increased the amount every year thereafter. Now, my monthly SIP is around Rs. 42,000/-. Most of my SIP investment is in the equity mutual fund & only a smaller portion is there in the Debt Fund. Investment in the debt fund was started by me in 2020. Now, since the market is almost at its peak, I want to withdraw some funds from the SIP MF to invest in real estate. What will be the tax implication on withdrawals of the partial fund from the SIP? Whether capital gain calculation will be on average price basis or LIFO basis? Whether I will be eligible for indexation & capital gain benefit investment in the real sector? Whether I can save tax if I invest in REC Bonds? [ad********aja@gmail.com]

Opinion:

Systematic Investment Plan (SIP) is considered as one of the best modes of investment in the mutual fund. Lot of investors prefer SIP as it is an easy & comfortable mode of Investment. Income from mutual funds, whether equity or debt fund, is also subject to taxation at comparatively very lower rate of taxation. However, calculating tax on investment could be a little tedious and laborious. The taxation of returns depends on the kind of funds in which amount is invested i.e., whether investment is in debt schemes or equity schemes. Also, the duration of investments is relevant to determine whether the gain is short-term capital gain (STCG) or long-term capital gains (LTCG). Let us know about it:

Taxation of Equity schemes (EOMF):
If a mutual fund invests more than 65% of its fund in equity then such mutual fund scheme qualifies as equity oriented mutual fund (EOMF) or equity scheme for the purpose of taxation. Arbitrage funds are treated as equity schemes for the purpose of taxation whereas International fund stocks abroad & Fund of funds are also treated as debt funds for the purpose of taxation.

  1. a)If EOMF are sold within a year of its investment, returns would be treated as Short Term Capital Gain (STCG) & taxed at a special rate of 15% U/s 111A.
  2. b)If EOMF is sold after a year of its investment, returns would be treated as Long Term Capital Gain (LTCG). LTCG on equity mutual funds is taxable if it exceeds Rs. 1 Lakh in a year & the tax rate is just 10%. No indexation benefit is available on such investment. However, all the gain from till 31.01.2018 will be exempt from tax & appreciation in the value after 31.01.2018 will only be taxable. .

Taxation of Debt schemes of Mutual Fund:

  1. a)If invested in a debt fund for less than 3 years, returns are treated as STCG for taxation purposes. STCG are added to the income and taxed as regular income according to the applicable income tax slab.
  2. b)If investment in a debt fund is for a period of more than three years, returns would be considered as LTCG. It will be taxable @ 20% with indexation benefit.

 

Taxation of investment done through Systematic Investment Plan (SIP):
Systematic Investment Plan (SIP) is the method of investing a fixed amount in a mutual fund in a periodic manner (may be weekly, fortnightly, monthly, quarterly or yearly). Gains arising from SIPs are taxed according to the nature of the mutual fund (debt or equity) & according to the holding period, as already discussed above.

In SIP, there are multiple dates of acquisitions as a fixed amount is invested at regular occasions. For the purpose of taxation, each individual SIP is treated as a separate & fresh investment & gain on it is required to be computed separately. For calculating gain, FIFO (First in- First Out) Rule is followed and capital gain has to be computed with reference to units sold vis a vis its acquisition. Based on the number of units sold, one needs to determine the equivalent number of units purchased with corresponding date & purchase price. It is possible that the number of units sold can belong to different dates. Units purchased, date wise and cost wise, need to be allocated to the units sold on “FIFO” basis to arrive at the amount of capital gain amount.  An example illustrated below would make the understanding easy. Suppose a person is investing Rs. 10,000/- every month by way of monthly SIP. After receipt of the amount, the Mutual fund will allot units to the investors based on its Net Assets Value (NAV). On the basis of illustrative NAV given below, the investment as well unit balance of the investor in mutual fund is illustrated as under:

SIP Investment Date Investment Amount NAV Units Allotted Total Units
1st 01.11.2021 Rs. 10,000 Rs. 15 666 666
2nd 01.12.2021 Rs. 10,000 Rs. 14 714 1380
3rd 01.01.2022 Rs. 10,000 Rs. 17 588 1968
4th 01.02.2022 Rs. 10,000 Rs. 16 625 2593
5th 01.03.2022 Rs. 10,000 Rs. 15 666 3259

Only 5 investments of Rs. 10,000/- each are considered for the sake of illustration ignoring fractional units. Let us assume that investors want to withdraw Rs. 40,000/- from the SIP on 02.01.2023 at a prevailing NAV of Rs. 20/-. To withdraw the amount of Rs. 40,000/- @ Rs. 20/- per unit, he would be required to redeem 2000 units which means that all units purchased on 1st Nov, Dec, January (i.e., 1968 units) & 32 units from investment of 01.02.2022 would be redeemed. Since 1968 units are held for more than one year, gains from 1968 units would be treated as LTCG. Gain from 32 units would yield STCG as the investment is held for a period of less than one year.
Taxpayers may note that the mutual Fund house also provides the profit/loss statement on the above basis.
[Further, the NAV as on 31.01.2018 can be accessed at the website of Association of Mutual Funds in India’s (Amfi) website by clicking at www.amfiindia.com/net-asset-value/nav-history]

Investment in Real Estate & Capital Gain Exemption:

  1. a)Taxpayers can claim capital gain exemption U/s 54F by investing the amount towards purchase or construction of the residential house property (& not commercial properties or agricultural land). However, taxpayers must check the other stipulations & conditions for exemption U/s 54F before moving forward].
  2. b)Capital gain exemption by way of investment in the REC/PFC/IRFC bonds U/s 54EC is available only if the capital gain arises from transfer of land or building.  It is not available in respect of gain arising from mutual funds or shares.

[Readers may forward their feedback & queries at taxtalknew@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com ]

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