Short & Long-term Tax Implications

What are the tax implications for SIP investment? If I start the SIP on January 1, 2007, and continue it for a year, can I sell all the units at the end of the year (January 2008)?
—Shailesh

You can sell the units when you want. But you will be taxed if you do not hold them for at least a year. The SIP is nothing but a regular investment at defined periodicity. Hence, each installment of your SIP investment in an equity fund will be liable for short-term capital gains tax if not held for a minimum period of 12 months. So the units bought in February will be exempt from tax only if you sell it 12 months after February. And so on and so forth. You have to hold the units one year from the date you bought them, not from the date you started the SIP.

(Source: Value Research)

Switch to an ELSS Fund

Please advise whether investment switched from an ordinary equity fund to ELSS fund would be eligible for computing deductions under section 80C of that year? -Arvind Chandorkar


Yes, you can take 80C benefit in same financial year by switching from equity fund to ELSS fund. But if your tenure of investment in equity fund is less than a year then you have to pay short term capital gains tax while you switch.

(Source: Value Research)

Equity Speciality Funds Equity Speciality Funds

Is the DSPML World Gold Fund an Equity Fund or a Debt fund? On your site it is classified as an Equity specialty fund, but I am told that for tax calculations it is considered as a debt fund. Could you kindly clarify the same for me that what are the tax implications for this fund?
-Dr. Deepak S Ray

Yes, the tax treatment for this fund is same as debt fund because more than 65 percent of the fund corpus is invested in stocks of foreign companies. Long-term capital gain tax is zero only in the case of equity funds. Equity funds are defined as those which invest more than 65 per cent of their assets in Indian companies. Any fund not fulfilling this criterion will be subjected to the rules of debt fund.

DSPML World Gold fund is an equity based fund of funds mutual fund scheme. A large portion of this fund is invested in overseas mutual fund schemes, which in turn invest in stocks related to gold mining companies.

(Source: Value Research)

Taxation on MIPs

I would like to know about the tax treatment for MIPs? Are their returns treated as dividends or as capital gains?
—Shailesh Rawat.

Tax treatment of returns from Monthly Income Plans (MIPs) depends on the way you derive them. If you opt for dividend plan, then like all debt funds, MIPs are liable for Dividend Distribution Tax (DDT) which is 12.5 per cent for debt funds.

If you choose the growth plan, all gains will be treated as short-term or long-term depending on your period of holding. Any short-term gain (less than 1-year holding) from debt funds is added to your income. Long-term gain from MIPs is taxed at 10 per cent without indexation or 20 per cent with indexation, whichever is lower.

Deriving gain from an MIPs Growth option through Systematic Withdrawal Plan (SWP) could be more tax efficient than dividend plan. SWP is redemption of units worth predefined amount and periodicity. Besides, you will also have a greater control on your cash inflows.

(Source: Value Research)

Exit Load on ELSS

I had bought Reliance Mutual Fund ELSS on 13-10-2005. Now, on completion of 3 years I have to withdraw it. Can you please suggest me how should I go ahead with this and will the amount have an exit load? Will the profit be taxable?
—Sanjay Patil

Equity Linked Saving Schemes contains a 3-year lock-in period after which you can withdraw your money from the fund without paying any exit load. Since it is an equity fund held for more than a year, your profits are exempt from tax.

(Source: Value Research)