Is SIP Tax Free? Uncovering Surprising Truths About SIP Taxation

Today investing has become as much earning the income and when we talk about investing, systematic investment planning SIP is the best way to invest your money in any mutual fund or stock market.

If you are someone who is just planning to start investing through SIP but stuck at how taxation works for SIP then don’t worry.

Here is quick in depth guide about the how the taxation works for a SIP.

Is SIP Tax Free?

No, SIP is not tax free if I talk about in clear words. But the taxation of your SIP depends upon how long you stay invested through the SIP & in what type of mutual fund your doing a SIP.

Before understanding how SIP are taxed, let us quickly understand what is SIP?

What is SIP and How It Works?

SIP or Systematic Investment Plan is a way through which you invest your money in mutual funds on regular intervals like every month consistently.

SIP in simple terms is a way of investing and not a financial option where you invest your money.

To invest in a mutual, you have got two option one time investment of your whole money or putting some amount every month or at a regular interval for a long period of time.

While most people can’t afford a big one time investment, hence they decide to keep aside some money every month from their income and put that money into work by doing a SIP so that their money keeps deducting automatically and their wealth can start building.

That’s how a SIP works.

Also Read, Investment In SIP Good or Bad? – Compare SIP Benefits & Disadvantages

How Taxation of Capital Gains on SIP Works?

Now we have an actual idea what is a SIP and how it works, so here is the time to understand how taxation of capital gains on SIP works.

Your investment on SIP in mutual fund is applicable for income tax but how much tax on sip you have to pay that depends upon two things:- time horizon and mutual fund type.

There are three types of funds and all are taxed differently, let’s check out how they are taxed.

Equity Mutual Fund Taxation

Equity Mutual Fund are those funds who invest in equity or different stocks across different industries with different market cap.

The current tax on equity mutual fund SIP is:-

• Long Term Capital Gains (LTCG) – If you stop your SIP and sell the equity mutual after holding it for minimum 12 months then as per India’s 2024 Budget, you will be going to taxed at 12.5% if the gains are more then 1.5 lakhs. While if the gains are less then 1.5 lakhs then you don’t need to pay a single penny in tax for SIP.
• Short Term Capital Gains (STCG) – If you stop your SIP and sell the equity mutual before 12 months of holding then as per India’s 2024 Budget, you will be going to taxed at 20% tax rate on all your short term capital gains made on equity mutual fund.

Debt Mutual Fund Taxation

Debt mutual fund are those who invest in debt instrument like treasury bills, bonds, debentures, etc.

If you have started doing SIP in debt mutual fund after 1st of April 2023, then you will be taxed at your applicable tax slab rate. There is no long term capital gains tax or short term capital gain tax on debt mutual fund now.

Hybrid Fund Taxation

Hybrid fund as the name suggest is made up from the combination of equity and debt fund both.

If you are doing a SIP in equity oriented hybrid fund then you will taxed as per equity mutual fund taxation.

While if you are doing a SIP in debt oriented hybrid fund then you will taxed as per debt mutual fund taxation.

In simple terms, the hybrid fund taxation works as per what type of fund you are majorly invested in equity or debt based.

(Note – All, the mentioned taxation on SIP and tax rate on SIP is as per 2024 India Budget, if you are reading this later on or if you reside in some other country, do check the current taxation and tax rate on SIP in your country)

Is SIP Safe To Invest?

Now another one of the most asked question that is SIP investment is safe or not.

Before starting a SIP this question is much relevant too hence, let us understand this quickly.

If I say directly then no, SIP is not 100% safe because investing through SIP in mutual fund you are ultimately investing your money in the stock market.

While stock market or financial markets are volatile in nature hence, if you are investing in SIP for a short period of time like 1 month to upto 5 years then you can face some losses too.

That’s because SIP works best in long term and when I say long term it means 8-10 years because in such time span a market goes in bullish and bearish phase multiple times and ultimately you will be sitting at profit because in long term stock market or financial market increase usually if your country is growing.

Hence, SIP investment is safe but yes, it carries some risk in short term.

Frequently Asked Questions

Final Words – is SIP Tax Free?

Finally, you are now aware about how taxation on sip works.

Do remember SIP is not taxed separately, it is taxed as per your mutual fund type only.

Thus, while selecting a mutual fund you should be cautious about which mutual fund can help you save as much possible in taxation.

While if you wanted to pay zero tax on your SIP then you can consider investing in Tax saving mutual funds or ELSS mutual fund.

Disclaimer: The Honest American provides financial education, investing strategies, & stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.

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