Taxation of amount withdrawan from Mutual fund & Systematic Invetsment Plan (SIP)

Taxation of amount withdrawan from Mutual fund&Systematic Invetsment Plan (SIP)

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I am new to mutual funds & shares. How income from investment in mutual funds taxed? This is the common question asked by the taxpayer investing in mutual fund. The reason is obvious. Rising share market has lured many investors as alternate investment avenues like real estate, Bank FDR, Gold etc are not yielding desired results. Taxation of mutual funds is a hot topic now as majority of the taxpayers have to file their income tax return in the current month to avoid the late filing fee.

Mutual Funds:

For mutual fund investor, calculating tax on investment could be 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 scheme 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).

Kind of Investment:

  1. Debt schemes
  2. If invested in a debt fund for less than 3 years, returns are treated as STCG for taxation purpose. STCG are added to the income and taxed as regular income according to applicable income tax slab.
  3. 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.
  4. Equity schemes (EOMF):
    If  mutual fund scheme 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 fund for the purpose of taxation.
  5. If EOMF are sold within a year of its investment, returns would be treated as (STCG) & taxed at a special rate of 15% U/s 111A.
  6. If EOMF is sold after a year of its investment, returns would be treated as LTCG. Earlier, LTCG on Equity Mutual Fund was exempt from tax. But, amendment carried out by the recent Union Budget-2018 has made the LTCG on equity mutual funds taxable if it exceeds Rs. 1 Lakh in a year. No indexation benefit is available on such investment. The rate of taxation is just 10%. However, all the LTCG gain from EOMF in the FY 2017-18 (AY 2018-19) is exempt from tax. Now, Investment done prior to 01.04.2018 but sold afterwards will also be taxable now. However, appreciation till 31.01.2018 has been grandfathered, i.e., gains will remain tax-exempt & appreciation in the value after 31.01.2018 will be taxable. .

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 nature of mutual fund & according to the holding period, as already discussed above.

In SIP, there are multiple dates of acquisitions as fixed amount is invested at regular occasion. 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 amount, 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 01.06.2017 Rs. 10,000 Rs. 15 666 666
2nd 01.07.2017 Rs. 10,000 Rs. 14 714 1380
3rd 01.08.2017 Rs. 10,000 Rs. 17 588 1968
4th 01.09.2017 Rs. 10,000 Rs. 16 625 2593
5th 01.10.2017 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 investor want to withdraw Rs. 40,000/- from the SIP on 06.08.2018 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 June, July, August (i.e., 1968 units) & 32 units from investment of 01.09.2017 would be redeemed. Since, 1968 units are held for more than one year period, gain 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. The increase in the value of units from the date of investment to 31.01.2018 has been grandfathered (exempted) which means that the appreciation in its value above the NAV as on 31.01.2018 would only be taxable as LTCG for 1968 units & as STCG for 32 Units. Mutual Fund house also provides the profit/loss statement on 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


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