When financial advisors ask you to invest in equity mutual funds, it's often with the view that there would be tax saving in the long term. That is, there is no long-term capital gains tax after one year on direct equities and equity-diversified mutual funds after a year (more than 65 per cent of the corpus has to be invested in equities).
For the one-time investor, the tax impact is quite simple because there is a clear definition that if they sell before one year, the transaction would attract 15 per cent short-term capital gains tax. However, investors who are taking the systematic investment plans route, are often confused about the tax treatment.
| TAXING SIPS | |||
| Redeemed Amount (Rs) |
Long Term capital gains (Rs) |
Short Term capital gain/ loss (Rs) | |
| Oct, 2006 | |||
| Nov, 2006 | 6,209.11 | 1,209.11 | - |
| Dec, 2006 | 6,019.58 | 1,019.58 | - |
| Jan, 2007 | 6,009.96 | 1,009.96 | - |
| Feb, 2007 | 5,713.08 | 713.08 | |
| Mar, 2007 | 5,614.56 | 614.56 | |
| April, 2007 | 6,238.36 | 1,238.36 | |
| May, 2007 | 5,765.79 | 765.79 | |
| Jun, 2007 | 5,941.55 | 941.55 | |
| July, 2007 | 5,341.05 | 341.05 | |
| Aug, 2007 | 5,123.47 | 123.47 | |
| Sept, 2007 | 4,978.14 | -21.86 | |
| Oct, 2007 | 4,613.06 | -386.94 | |
| Total | 67,567.70 | 3,238.64 | 4,329.06 |
| Investment of Rs 5,000 every month redeemed at Rs 173.74 | |||
Often they could be in a situation where they book profits after starting investment a year back, but still find themselves taxed. Financial planners say that investors in SIPs should be especially careful because the taxation is done according to the first-in-first-out basis. "Each instalment, therefore, has to complete for tax relief," explained Sajag Sanghvi, certified financial planner.
The numbers would work out in this manner. For the short term, if one had been investing consistently since October 2006, there would have been periods where one could have booked profits, like the May, 2007 period because the net asset values were really high.
That is, regular investments of Rs 5,000 in an equity fund for seven months could have been worth something like Rs 41,570. That is, Rs 35,000 investment + Rs 6,570 gains). So now, if one were to redeem some units to raise Rs 10,000, there would be a short-term capital gains tax of 15 per cent on the transaction.
Now, using the same example, say a person investing through SIPs for a year, between October 2006 and October 2007 and stopped investing because he had completed a year. And he decides to redeem units in the first week of January, 2008, the tax treatment would be something like this.
The first three months' capital gains will be tax-free because they have completed a year. So a total gain of 3,238.64 will be tax-free (made in October, November and December, 2006). However, the rest 4,329.06 will be taxed at the 15 per cent tax rate because those instalments have not completed a year.
