How to calculate long-term capital gains tax on mutual fund SIPs
From April 1, 2018 any LTCG made on transfer of equity MFs will have to pay a 10 per cent tax on long-term gains above Rs 1 lakh per annum.
More importantly, it's not just investments made after April 1, 2018 that will only count towards LTCG tax but any purchase made between February 1, 2018 and March 31, 2018 and beyond will also be subjected to LTCG, if the holding period condition is met.
For an MF investor, this new tax will apply in any financial year whenever there is LTCG on redemption of equity MF if you have held those units for at least 12 months. When you invest you can do it either as a lump sum or take the systematic route (SIP), even while redeeming you can do it in one go or opt for a systematic withdrawal plan (SWP).
For mutual fund investors, calculating LTCG tax can be tedious and laborious, says Bhavana Acharya, deputy head, MF Research, FundsIndia.com. "It may be slightly easier for those with few funds or transactions," she adds
Here is how you can calculate LTCG on MF units.
Investing via SIP but redeeming as lump sum
If an investor who has been investing through SIP redeems equity MF units, this how he should calculate the tax on LTCG, according to Acharya: "For any redemption where there are multiple dates of investment, the first-in-first-out rule is followed. That is, it is assumed that the units bought first are the units that are sold first.
So first, based on the number of units sold, one needs to determine the equivalent number of purchase units and their corresponding dates. This equivalent number can come from more than one purchase date. Next, for these purchase dates, the net asset value (NAV) needs to be taken. The holding period also needs to be calculated for each purchase date to determine if it's long-term or short-term."
Let's look an example. Assuming, there's a monthly SIP of Rs 20,000 and units are allotted as per the table below. For better understanding only three months considered.
|Purchase date||Units||NAV(Rs)||SIP (Rs)|
Total units accumulated equals to 1177 ( Fractional units ignored) and the NAV on 01-May-2018 is assumed to be 75. Now, say 500 units are to be redeemed on 01-May 2018, then, 400 units of 01-may-2017 and 100 units of 1st June will be considered. As 400 units have completed 12 months, they will be subject to LTCG while the gains made on the balance 100 units will be shot-term in nature, as they have been held for 11 months.
But, some of the gains in one's SIP could have been accrued till January 31, 2018, which has been grandfathered (exempted) under the income tax rules, and therefore, will have to be accounted for accordingly. "So one needs to first compare the January 31 NAV and the sale value. The lower of these two values needs to be compared to the actual purchase NAV. The higher of these two values becomes the investment cost. The capital gain is the difference between the sale value and cost. This exercise needs to be done for each purchase NAV, " says Acharya.
Understandably, for investments in SIPs after January 31, 2018 such an exercise need not be done.
If one opts to redeem units through the SWP route, the mode of calculation will remain the same, if the purchase of all units were made before January 31, 2018 or partly or entirely after that date.
NAV as on 31 January 2018
An easier way out is if the fund houses or the registrar can give the investor a capital gains statement whenever it is required. The Computer Age Management Services (CAMS), a registrar and transfer agent for mutual funds, has already enhanced the capital gain and loss statement to include LTCG for equity-oriented mutual fund schemes from April 1, 2018. The statement will include the original cost and NAV as on January 31, 2018 and the statement for grandfathered equity schemes, across all mutual funds that are serviced by CAMS.
Alternatively, if someone wants to know the NAV as on January 31, 2018, you can get it from the Association of Mutual Funds in India's (Amfi) website by clicking here. (https://www.amfiindia.com/net-asset-value/nav-history). Hopefully, soon, even asset management companies will also start showcasing the NAV as on January 31, 2018 on their websites.
What you should do
Long-term gains will be taxed only if it exceeds Rs 1 lakh in one financial year. One may resort to harvesting or re-investing gains as and when the limit is near and re-invests it again. For those who might not be comfortable doing this, can shift to direct mutual fund schemes. Click here to know how direct MF may help provide for the taxes, even though they will still need to be paid.