Finance Minister Nirmala Sitharaman announced an increase in taxes on Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) for equity-oriented funds in the Union Budget. As a result, a Systematic Investment Plan (SIP) of ₹50,000 for 60 months in equity funds will now incur a higher capital gains tax of ₹94,095, up from the current ₹77,456.
The Union Budget raised the STCG tax on equity mutual funds to 20 percent from the previous 15 percent. The LTCG tax will now be 12.5 percent, up from 10 percent. Additionally, the exemption limit for LTCG tax has been increased to ₹1.25 lakh from ₹1 lakh per financial year.
Here’s how your SIPs will be taxed following the Union Budget announcements:
Each SIP instalment is treated as a separate investment for tax purposes. For example, if you invest ₹20,000 in an equity mutual fund through SIPs, each instalment will be considered separately to determine the holding period and applicable tax rate.
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Due to the increase in LTCG tax from 10 percent to 12.5 percent, long-term investors may have to pay slightly higher taxes. However, small investors might benefit from the raised exemption limit of ₹1.25 lakh. The increase in STCG tax to 20 percent will affect short-term equity investors.
According to the Budget, mutual funds investing more than 65 percent of their total proceeds in debt and money market instruments will be covered under Section 50AA. This means that exchange-traded funds (ETFs), gold mutual funds, and gold ETFs will not be considered specified mutual funds.