Investors often go the systematic way when it comes to mutual fund investments, as it allows for a more disciplined way of building wealth, while simultaneously reducing the risk exposure.
That said, the taxation here depends on two aspects, namely the nature of the investment, whether it is debt or equity, and the holding period.
To begin with, you would need to first classify whether the fund is equity or non-equity, as taxability would vary under both these options. You would then need to compute the holding period to identify whether the gains are short-term capital gains (STCG) or long-term capital gains (LTCG).
At the time of redemption of the transferred units, investors would have to pay either LTCG tax or STCG tax depending on the holding period. The tax is 10 per cent and 20 per cent for STCG and LTCG, respectively. An exemption of Rs 1 lakh a year is available for all LTCG on equity-oriented schemes as well as listed equity shares of domestic companies in aggregate.
So, here are different ways to explain systematic investment plans (SIPs), systematic withdrawal plans (SWPs), and systematic transfer plans (STPs).
Systematic Investment Plan: SIP is a strategy where the investor chooses to invest either monthly, quarterly, or yearly, depending on the scheme.
SIPs on equity funds are taxed as LTCGs if held for more than one year and as STCGs if held for less than one year from the date of purchase. This applies to each purchase tranche individually. SIPs on non-equity or debt and other categories funds are taxed as LTCG if held for more than three years, and as STCG if held for less than three years from the date of purchase.
Says Anita Basrur, partner, direct tax, Sudit K Parekh & Co. LLP: “Capital gain tax will accrue to investor at the time of redemption from the fund and based on the holding period of the underlying units, capital gains will be either short -term or long-term. Further, the tax rate for equity-oriented fund will be 15 per cent/10 per cent for short-term/long-term respectively.”
In Budget 2018-19, there was an important announcement on ‘grandfathering’ clause associated with LTCG tax. It stated that all investments made before February 1, 2018, will not incur any tax and the value of the holding as on January 31, 2018, will be considered as the cost of acquisition for gains calculation.
Systematic Withdrawal Plan: This case is reverse of SIP strategy. The taxable event under this scheme would arise at the time of redemption of the units. In case of debt funds, if the holding period is less than three years, then the capital gains realised will be added to the overall income and taxed according to your income tax slab rate. If the holding period is more than three years, then capital gains will be considered as ‘long-term’ and taxed at 20 per cent after indexation. In the case of equity funds, if the holding period is less than one year, then the capital gains realised will be taxed at 15 per cent. On the other hand, if the holding period is more than one year, then LTCG tax will apply, which is 10 per cent without indexation.
Systematic Transfer Plan: Under this plan, the investor opts to transfer from one scheme to another scheme of the mutual fund under the same mutual fund family (usually debt to equity). It is considered to enable a disciplined and planned transfer of funds between two mutual fund schemes. In most cases, the investors initiate an STP from a debt fund to an equity fund.
Adds Basrur: “Taxability arises on two occasions. First, at the time of transfer of the original units from one fund to another if the units pertained to debt fund, a tax rate of 30 per cent will apply, if units are held for less than 36 months. In the second case, a tax rate of 20 per cent will apply after giving indexation benefit.”
