How Much Capital Gains Tax Will You Pay on a ₹1 Crore SIP Withdrawal?

Investing in mutual funds through a Systematic Investment Plan (SIP) has become one of the most popular ways to generate long-term wealth. However, many investors are unaware of the tax implications when they withdraw their investments. If you have accumulated ₹1 crore through SIPs and plan to withdraw it, it is essential to understand how much capital gains tax you will have to pay.

Understanding Taxation on Mutual Fund Earnings

The tax on mutual fund gains depends on two key factors:

1. The type of mutual fund – Whether it is an equity fund or a debt fund.
2. The holding period – How long you have held the investment before withdrawing.

Let’s break down how taxation works in both scenarios.

Taxation on Equity Mutual Funds

An equity mutual fund is one where at least 65% of the portfolio is invested in equities. The taxation rules are as follows:

Short-Term Capital Gains (STCG):

• If you sell your equity mutual fund units within one year, the profit is considered short-term capital gain (STCG) and taxed at 15%.
• Example: If you withdraw ₹1 crore and your profit is ₹50 lakh, the tax payable would be ₹7.5 lakh (15% of ₹50 lakh).

Long-Term Capital Gains (LTCG):

• If you hold the equity fund for more than one year, the profit falls under long-term capital gain (LTCG) taxation.
• The first ₹1 lakh of LTCG is tax-free.
• Any gain exceeding ₹1 lakh is taxed at 10%.
• Example: If you withdraw ₹1 crore and your profit is ₹50 lakh, you will get an exemption on ₹1 lakh, and the remaining ₹49 lakh will be taxed at 10%, resulting in a tax of ₹4.9 lakh.

Taxation on Debt Mutual Funds

Debt mutual funds are those where less than 65% of the portfolio is invested in equities. The taxation rules are different from equity funds.

Short-Term Capital Gains (STCG):

• If you withdraw your debt fund investment within three years, the profit is considered short-term capital gain.
• This gain is added to your total income and taxed as per your applicable income tax slab.
• Example: If your total taxable income, including the gain, falls in the 30% slab and you earn ₹50 lakh as profit, you will pay ₹15 lakh (30% of ₹50 lakh) in taxes.

Long-Term Capital Gains (LTCG):

• Earlier, long-term gains on debt funds were taxed at 20% with indexation benefits.
• However, from April 1, 2023, debt fund gains, even after three years, are now taxed as per your income tax slab.
• This means that if you are in the 30% slab, you will still pay ₹15 lakh tax on a ₹50 lakh gain.

Taxation on Hybrid (Balanced) Mutual Funds

Hybrid funds invest in both equity and debt in varying proportions. The taxation depends on the proportion of equity:

• If equity exposure is 65% or more, it is taxed like an equity fund.
• If equity exposure is less than 65%, it is taxed like a debt fund.

How to Reduce Tax on SIP Withdrawals?

If you want to minimize the tax burden on your SIP withdrawals, here are some smart strategies:

1. Systematic Withdrawal Plan (SWP)

Instead of withdrawing a lump sum amount, you can use an SWP to withdraw smaller amounts periodically. This will help you stay within the tax-free LTCG limit of ₹1 lakh per financial year.

2. Staggered Withdrawals

If you need to withdraw a large sum, consider withdrawing it in phases over multiple financial years. This will help reduce your taxable income and lower the overall tax liability.

3. Utilize Tax Exemptions

If you are in a lower tax slab, try to structure withdrawals so that gains do not push you into a higher tax bracket. Also, take advantage of available exemptions such as the ₹1 lakh LTCG exemption for equity funds.

Conclusion

Understanding the tax implications of your mutual fund withdrawals is crucial for effective financial planning. If you have accumulated ₹1 crore through SIPs, make sure you evaluate your fund type, holding period, and tax strategy before withdrawing. By using techniques like SWP and staggered withdrawals, you can significantly reduce your tax burden and optimize your wealth accumulation.

If you are unsure about the best strategy for your situation, consider consulting a financial advisor for personalized tax planning advice.