Mutual Fund Unlocked: How to determine LTCG on your SIP?

In the Union Budget 2018, Government of India reintroduced the Long term capital gain (LTCG) tax on the equity investments. From April 1, 2018, investors need to pay 10 per cent of LTCG on transfer of equity mutual funds having exposure of 65 per cent or more in equity or equity-related instruments. A gain of over and above 1 lakh are only taxed under LTCG. Also, LTCG made till January 31 are exempt under the grandfathering clause.

With all these changes many investors are a bit confused with the calculation of LTCG for their SIPs. First and the most important thing is that the investments made after February 1, 2018 are subjected to LTCG tax on the fulfilment of holding period condition (12 months). Lets have a look at how the LTCG will be calculated on mutual fund SIPs.

SIP is a systematic investment plan where investors invest a fixed amount every month due to which there are many buying dates for the purchase of units. So here the first-in-first-out rule is followed. Also here it is assumed that the units bought first are the units that are sold first.

Therefore, an individual needs to determine the number of units purchased and dates on the basis of the sold units. It is possible that the number of units can be from different purchase dates. Going ahead, the NAV’s for those dates should be considered and the holding period should be determined to know the long term or short term gains.

Let's understand this with an example assuming monthly SIP of Rs. 15,000 and units purchased as per the table given below. To make things simplier, the time span is considered to be four months.

Total units accumulated during the four months equals to 1165 and the NAV on May 1, 2018 is assumed to be 75. Now, say 500 units are to be redeemed on May 1, 2018, then, 273 units of May 1, 2017 and 227 units of June 1, will be considered. As 273 units have completed 12 months, they will be subject to LTCG while the gains made on the balance 227 units will be shot-term in nature, as they have been held for only 11 months.

Out of this, some of the gains have been accrued before January 31, 2018 which should be grandfathered. So the NAV of January 31, will be compared with the sale value that is value as on May 31, 2018. The lower of these values will be further compared with the actual purchase price. With this comparison, the higher among these values will be considered as the investment cost. Finally, the capital gain will be the difference between the cost and the sale value. In a similar way, the LTCG calculation for the redemption through SWP route can be done.

The LTCG applicable on SIP can be calculated by the above method. Also, the fund houses can give the capital gain statement to the investors which can be used to determine the tax liability.