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HomeMutual FundHow mutual fund SIP models are taxed (labored instance)

How mutual fund SIP models are taxed (labored instance)


A reader asks, “I’ve a query relating to Taxation on withdrawal of SIP mutual fund models. Are you able to throw some mild on how the models can be taxed?”

First, it have to be understood that the SIP is simply an automatic method of shopping for mutual funds models every month (usually). Nonetheless you purchase mutual fund models – by way of SIP or lump sum at arbitrary intervals, the taxation rule is similar.

The one distinction issues the kind of fund: fairness or non-equity (debt funds, gold funds, worldwide funds and all fund of funds).

Now allow us to think about a schedule of mutual fund transactions. All of those besides the final entry symbolize purchases. We now have used our Google sheets MF and inventory tracker to generate this immediately.

Schedule of SIP transactions used for explaining mutual fund taxation
Schedule of SIP transactions used for explaining mutual fund taxation

The final line in yellow represents the redemption date with a NAV of Rs. 78 per unit. Now, suppose we redeem Rs. 3 lakhs. We have to learn how many models might be redeemed. We additionally want to seek out the age of such models. On this instance, we’ll assume all models are older than one yr. So we will solely think about long-term capital features tax of fairness funds.

That is simple: 300000/78 = 3846.1538 models (technically, NAV is said as much as 4 digits, so the models additionally ought to be rounded off to 4 digits, however most NAV portals solely report as much as 2 digits).

The subsequent step is to find out which models might be redeemed. The rule is first-in, first-out. That’s, models invested first might be redeemed first. That is simpler mentioned than executed in a SIP or in any scenario with a number of transactions.

Within the picture, column E (cell E2) represents the models’ present worth in column D’s corresponding rows (cell D2). For instance, 616.2189 models bought on 4-5-2020 have a present worth (date of redemption) of 616.2189 x 78 = Rs. 48,065.07271. That is nicely under the whole redemption quantity of Rs. 3 lakhs.

So we hold going. E3, E4, E5, and many others., whereas additionally noting their sum.

Computation of mutual fund tax utilizing in first-in, first-out methodology

The sum of cells E2 to E8 is Rs. 292463.0242. So all of the models comparable to the primary seven purchases (cells D2 to D8) might be redeemed.

For the reason that complete redemption quantity is Rs. 3 lakhs, solely models presently price 300000 – 292463.0242 = Rs. 7536.9758 might be redeemed. That is proven in cell E9 (highlighted in inexperienced).

Utilizing the present NAV of Rs. 78, we discover that this corresponds to 96.6279 models bought on 3-12-2020 (row 9). The NAV on this date is Rs. 58.73 per unit.

The acquisition worth of those models = 96.6279 x 58.73 = Rs. 5674.9563.

Now we pay tax on the capital achieve. Capital achieve = present worth minus buy worth.

We will assume the fund is an fairness fund. Within the case of a non-equity fund, the acquisition worth should be modified utilizing the associated fee inflation index. That is illustrated right here:  Taxation of worldwide mutual funds defined with an instance.

Some models have been bought at a NAV of Rs. 40.57 per unit and a few at a NAV of Rs. 43.32 per unit and many others. Due to this fact the capital achieve should be accounted for with the right buy worth. Column G within the picture above = Column E minus Column F (corresponding rows).

  • The sum of the present worth of the models redeemed: Rs. 3,00,000
  • The sum of the acquisition worth of the models redeemed: Rs. 180674.9563
  • The overall capital achieve is the distinction: Rs. 119325.0437

Since that is an fairness fund, the primary Rs. 1 lakh is tax-free. So the efficient taxable achieve is just Rs. 19325.0437.

Now 10% of this might be taxed. So Rs. 1932.5043. There’s a 4% schooling cess on this = Rs. 77.3. So the whole tax is Rs. 2009.8045. So the post-tax redemption is Rs. 300000 minus Rs. 2009.8045 = Rs. 297990.1955.

Think about how complicated the calculation might be if (a) some models are lower than twelve months previous and a few older or (b) if it’s a non-equity fund. Then we have to decide the associated fee inflation index in every monetary yr of the redeemed models and inflate the acquisition worth to the monetary yr of buy (see instance linked above) or (c) if there are a number of redemptions previously – we have to guarantee redeemed models usually are not accounted for once more.

This naturally brings a query: “If I want to redeem Rs. 1 lakh from fairness funds annually, can I discover the approximate models to redeem?” As a spreadsheet implementation problem, creating a software for this could be attention-grabbing. Nonetheless,  we don’t suggest this as it’s pointless. See examples right here: Ought to I ebook yearly earnings (as much as the tax-free restrict of 1 lakh) to decrease Fairness LTCG Tax?

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