Is SIP Tax Free?

Is SIP Investment Tax Free?

This will depend on which country you’re investing in.

The UAE

In the UAE, there is no personal income tax. This also usually extends to your income through mutual funds or SIPs. 

Thus, in terms of whether SIP is tax free or not, you can enjoy tax-free returns on your investments. 

India

India is a popular investment destination for UAE residents. However, while the market is known for its stellar returns, it also brings taxes.

With respect to SIP investments in India, the answer to our query of ‘is SIP tax free’ will depend on which type of mutual fund you’re investing in. The tax rate, in turn, will depend on your holding period.

How Does Tax Work on SIPs in Mutual Funds?

As mentioned earlier, UAE-based SIPs or mutual funds won’t bring any taxes.

However, if you’re investing in India, this will depend on two main factors —

Holding Period

If your mutual fund investment is of less than 1 year, it will fall under Short-term Capital Gain Tax (STCG). While the actual tax will depend on the type of mutual fund you invest in, as per the 2024 budget regulations, STCG rates can now go up to 20%.

For investments held for more than 1 year, Long-term Capital Gain Tax (LTCG) applies. This rate can be as high as 12.5% with the latest updates. 

Important: If your profit in a financial year under LTCG is up to ₹125,000 (INR 1.25 lakh), you won’t have to pay any tax on the same.

Type of Mutual Fund

This factor also affects your SIP taxes — 

• Equity Funds: SIPs in such mutual funds attract standard taxes. The LTCG and STCG limits will apply as per the data given above, i.e. 12.5% and 20%, respectively. 
• Debt Funds: Capital gains made from SIPs made in debt funds after April 1, 2023 are considered STCG, no matter the holding period. Furthermore, indexation benefits won’t be available for them. However, for debt fund SIP investments before the said date and with a holding period of 3 years or more, the fund will get an indexation benefit.
• Tax-saving SIPs (ELSS): The most popular investment instrument for those seeking tax benefits in mutual funds is the Equity Linked Savings Scheme (ELSS). With SIPs in ELSS, you can enjoy tax deductions of up to ₹150,000 (INR 1.5 lakh) in a financial year. 

With that said, keep in mind that from the date on which you invest, your investment will be considered ‘locked-in’ for the next 3 years. Furthermore, LTCG tax may apply.

How to Make Tax-Effective SIP Investment?

While the answer to whether SIP is taxable or not depends on which country you’re investing in, it’s worth noting that you can easily strategise and make tax-efficient investments. Here are some tips for the same — 

• Select a suitable fund: You must consider choosing the right fund between equity and debt funds wisely as per your tax slab and investment horizon.
• Invest in ELSS: For tax-saving investment purposes, invest through SIP in ELSS funds. With this investment route, you can enjoy the dual benefits of tax savings and attractive returns.
• Make Investment for the Long Term: LTCG rates are usually lower than those of STCG. Moreover, with long-term investments, you can enjoy the rewards of compounding as well. To get both these benefits, make investments for the long term. 
• Tax Harvesting: Consider liquidating and reinvesting your gains consciously to use the applicable exemption limit.

Frequently Asked Questions