Tax planning through SIPs is not just about saving money — it’s a smart way to grow wealth while keeping your tax bill under control. Whether you’re a salaried professional or a long-term investor, systematic investment plans (SIPs) can be structured to optimise your tax burden and improve your overall returns. How exactly can SIPs help you reduce taxes legally? Let’s break it down.
How SIP Taxation Works in India:
When you invest via SIP, each installment is treated as a separate investment for tax purposes. or equity mutual funds, if you redeem units within a year, the gains are taxed as short-term capital gains (STCG) at 15%. For long-term equity investments (LTCG) above ₹1 lakh is taxed at 10% (without indexation).
And if you invest in debt funds, the tax rules are different — STCG (holding less than three years) is taxed per your income slab, while LTCG (holding more than three years) is taxed at 20% with indexation benefits.
Strategising SIPs for Tax Efficiency:
To plan taxes well through SIPs, start with equity‑oriented funds — since they get the favourable LTCG tax treatment. Moreover, you can take advantage of ELSS (Equity‑Linked Savings Scheme) via SIP. ELSS has a 3-year lock-in and offers a Section 80C tax deduction (up to ₹1.5 lakh), helping you reduce your taxable income.
In addition, by staying invested for more than a year, you aim for long-term capital gains. These gains benefit from the ₹1.25 lakh exemption first, limiting your tax liability. For example, if your total LTCG is ₹1.40 lakh, only ₹15,000 is taxed.
Risk Management and Tax Harvesting:
Tax planning through SIPs is not just about long-term gains. It’s also about risk management and tax‑loss harvesting. If some of your mutual funds are underperforming, you can strategically sell loss-making units to offset gains from other funds. This helps reduce your net taxable gains. You can also use different folio numbers or segregate SIP investments by goals — this way, you can realize gains in a controlled fashion, optimising when you book them.
Key Rules & Monitoring:
Here are some practical points to keep in mind:
- Track your yearly LTCG: Make sure your realised gains stay within the ₹1.25 lakh exemption, if possible, to minimise tax.
- Use folios wisely: By separating investments by folio, you can sell units in specific portfolios without disrupting the rest of your SIPs.
- Avoid knee-jerk redemptions: Don’t redeem just because of short-term market dips; that could trigger STCG or reduce your long-term compounding power.
- Stay compliant: Declare your capital gains when you file ITR. Use Form 26AS / AIS to verify transactions and make sure you correctly report gains. If you’re unsure, consult a tax advisor.
Why This Matters Now: Policy Updates
The 2024 Budget updated capital gain tax rules on mutual funds: STCG on equity‑oriented funds went up to 20%, and LTCG rose to 12.5%. These changes make it even more crucial to plan your SIP strategy. Without planning, your long-term wealth could be eroded by tax. With smart tax planning through SIPs, you can preserve more of your returns.
Conclusion:
Tax planning through SIPs is a powerful way to marry disciplined investing with smart tax management. By choosing the right funds, holding them strategically, and harvesting gains wisely, you can reduce your tax burden while riding the equity market’s growth. Start or increase your SIP today—every month delayed is tax saved tomorrow!
– Ketaki Dandekar (Team Arthology)
Read more about Tax planning through SIP here –https://cleartax.in/mutual-funds-taxed