Budget 2024: Explainer On Changes In SIP Taxation

The Mutual fund industry of India is currently valued at $0.66 trillion and is expected to grow to $1.61 trillion by 2029 in terms of assets under management (AUM). Investors are offered two modes of investment in mutual funds: Lumpsum and SIP. The calculation of taxes payable on lump sum investments is pretty straightforward, but what about SIP investments, which are a more popular way of investing among the general public?

In this blog, we will discuss the changes in STCG and LTCG tax introduced in the Budget 2024, process of calculating taxes on SIP and the impact of tax rate changes.

What is Capital Gains Tax?

It is a tax applicable to the profits earned from the sale of a capital asset. When you sell an asset at a price higher than initial buying price, you earn capital gains. In case of mutual funds, allotment is done based on the NAV.

For example – You bought one unit of a mutual fund having NAV of 100. Your total buying was 1*100 = INR 100. Now, after some time, you sold this one unit at 150. So, you earned 50*1= INR 50, i.e., capital gains. 

It can be of two types based on the holding period of the asset:

• Long term capital gains tax is the tax applicable to the profits earned upon selling the asset after a certain time period. 
• Short term capital gains tax is the tax applicable to the profits earned upon selling the asset before a certain period of time. 

The time period for equity or equity oriented mutual funds is one year, which means STCG will apply if the holding period is less than a year and LTCG if the holding period exceeds one year. Keep in mind that the time period for distinction between long term and short term varies for different assets. However, in this blog we will only deal with equity mutual funds for easy understanding.

BUDGET 2024 Update 

Currently, in LTCG in equity, there is no tax till the income of one lakh; post this limit, a 10% tax is applicable without indexation benefit. In the case of STCG, there is a flat 15% tax on gains without indexation benefit. 

The budget introduced by the Government of India proposed the following changes:

• LTCG for equity and equity-related instruments has been hiked from 10% to 12.5% and exemption limit has also been raised from INR 1,00,000 to INR 1,25,000

• STCG for equity and equity-related instruments has been hiked from 15% to 20%

Read Also: Unveiling the Budget 2024: Key Takeaways

How Will the SIPs Be Taxed? 

SIP or Systematic Investment Plan is a type of investment plan in which an investor invests small amounts periodically instead of a lump sum investment. Each installment of a SIP is considered as a separate investment for tax purposes due to which the holding period of each installment will be different from one another. Let’s understand how the SIPs will be taxed with the help of an example.

Suppose Rohan started a monthly SIP of INR 1,00,000 in an equity mutual fund for 2 years, starting from 1 Aug 2024 till 1 July 2026. On 1 Aug 2024, with an SIP amount of 1,00,000 he purchased 1,000 units with an NAV of 100 (1,00,000 INR /100 NAV = 1,000 units). With each SIP, he accumulated certain units of the mutual fund.

So, after 24 months, i.e. 1 July 2026, his total value of the portfolio is app. INR 30 lakhs (investment amount = 24 lakhs, profit = 6 lakhs). Now, on 2 July 2026, he wants to sell the entire mutual fund units with an NAV of 142.

Remember that, for calculation of capital gains, we use the First-in First-out (FIFO) method, i.e., the units which are purchased first assume to be sold first. As installments were invested at different points in time, we need to separate LTCG and STCG. The gains earned during the first 12 months will be termed as long term capital gains as one year is completed and gains earned in the last 12 months will be termed as short term capital gains because they are redeemed before completing one year. 

Have a look at the table below:

Sl. No.	Date	SIP Amount	NAV	Units	Capital Gain	Holding Period (Months)	STCG	LTCG
1	01-Aug-24	1,00,000	100	1,000	42,000	23	–	42,000
2	01-Sep-24	1,00,000	105	952	35,238	22	–	35,238
3	01-Oct-24	1,00,000	98	1,020	44,898	21	–	44,898
4	01-Nov-24	1,00,000	106	943	33,962	20	–	33,962
5	01-Dec-24	1,00,000	103	971	37,864	19	–	37,864
6	01-Jan-25	1,00,000	105	952	35,238	18	–	35,238
7	01-Feb-25	1,00,000	109	917	30,275	17	–	30,275
8	01-Mar-25	1,00,000	107	935	32,710	16	–	32,710
9	01-Apr-25	1,00,000	111	901	27,928	15	–	27,928
10	01-May-25	1,00,000	104	962	36,538	14	–	36,538
11	01-Jun-25	1,00,000	112	893	26,786	13	–	26,786
12	01-Jul-25	1,00,000	107	935	32,710	12	–	32,710
13	01-Aug-25	1,00,000	99	1,010	43,434	11	43,434	–
14	01-Sep-25	1,00,000	108	928	31,725	10	31,725	–
15	01-Oct-25	1,00,000	118	847	20,339	9	20,339	–
16	01-Nov-25	1,00,000	119	840	19,328	8	19,328	–
17	01-Dec-25	1,00,000	121	826	17,355	7	17,355	–
18	01-Jan-26	1,00,000	124	806	14,516	6	14,516	–
19	01-Feb-26	1,00,000	134	746	5,970	5	5,970	–
20	01-Mar-26	1,00,000	132	758	7,576	4	7,576	–
21	01-Apr-26	1,00,000	127	787	11,811	3	11,811	–
22	01-May-26	1,00,000	135	741	5,185	2	5,185	–
23	01-Jun-26	1,00,000	135	741	5,185	1	5,185	–
24	01-Jul-26	1,00,000	140	714	1,426	0	1,426	–
	Total	24,00,000		21,127	6,00,000		1,83,852	4,16,148

He sold the entire holding with an applicable NAV of 142 on 2 July 2026, which earned him INR 6 lakhs as capital gains. Here, 

• Short term capital gains = INR 1,83,852
• Long term capital gains = INR 4,16,148

Tax Calculation 

Now, we will calculate the tax on the capital gains made by him. 

Based on tax rates before Budget 2024:

LTCG after deduction = INR 4,16,148 – INR 1,00,000 = INR 3,16,148

LTCG tax rate = 10%

LTCG taxes = 10% * 3,16,148 = INR 31,615

STCG tax rate = 15%

STCG taxes = 15% of 1,83,852 = INR 27,578

Total taxes payable = INR 31,615 + INR 27,578 = INR 59,193

Based on tax rates proposed in Budget 2024:

LTCG after deduction = INR 4,16,148 – INR 1,25,000 = INR 2,91,148

LTCG tax rate = 12.5%

LTCG taxes = 12.5% * 2,91,148 = INR 36,394.

STCG tax rate = 20%

STCG taxes = 20% of 1,83,852 = INR 36,770.

Total taxes payable = INR 36,394 + INR 36,770 = INR 73,164

Particulars	Tax payable as per earlier rates	Tax payable as per new rates	Difference
STCG Tax	27,578	36,770	9,192
LTCG Tax	31,615	36,394	4,779
Total Tax Liability	59,913	73,164	13,251

From the above example, it is clearly visible that Rohan incurs a greater income tax liability due to the hike in capital gains tax rate introduced in Budget 2024.

Read Also: Budget 2024-25: How Will New Tax Slabs Benefit The Middle Class?

Conclusion

Many new investors prefer starting their mutual fund journey through a Systematic Investment Plan (SIP) as it is the most popular investment method in equity mutual funds. However, understanding the taxation of returns earned is crucial. 

The Budget 2024 has introduced changes to capital gains tax rates, resulting in higher tax liabilities for investors. It is important to understand the impact of the recent hike in Short term capital gains (STCG) and Long term capital gains (LTCG) rates. It is recommended to get in touch with your tax advisor for more detailed insights and calculations.

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