How Does Tax Work for SIP, STP, and SWP?
SIP is a systematic way of investing in Mutual Funds. STP involves regularly transferring money from one Mutual Fund to another, and SWP is about systematically withdrawing money from a Mutual Fund. For taxes, each SIP is treated as a separate investment at redemption, STP transfers are considered withdrawals and taxed on gains, and SWP withdrawals also generate taxable gains. Let’s compare them to taxes.
| Aspect | SIP | STP | SWP |
| Definition | Systematic Investment in Mutual Funds |
Systematic Transfer between Mutual Funds | Systematic Withdrawal from Mutual Funds |
| Tax Trigger | At the time of redemption of units |
Each transfer is treated as redemption from the source fund | Each withdrawal is treated as redemption |
| Tax Treatment | Each SIP installment is considered a separate investment for tax purposes |
Gains on the transferred amount are taxable |
Gains on the withdrawn amount are taxable |
| Capital Gains Type | It depends on the holding period of each installment (short-term or long-term) |
Based on the holding period of the redeemed units |
Based on the holding period of the withdrawn units |
- Taxation on SIPs
With a Systematic Investment Plan (SIP), each monthly contribution is treated as a separate investment with its own tax rules. For equity funds, long-term capital gains (LTCG) tax applies after 1 year, taxed 12.5% on gains above ₹1.25 lakh per year. Short-term capital gains (STCG) are taxed at 20%. Debt funds are taxed at your income tax rate, irrespective of the holding period. - Taxation on STPs
A Systematic Transfer Plan (STP) moves money from one fund to another, often from debt to equity. Each transfer is considered a sale, and taxes apply to any gains. For debt funds, both short-term gains & long-term gains are taxed at your income tax slab. For equity funds, short-term gains are taxed at 20%, and long-term gains above ₹1.25 lakh per year are taxed at 12.5%. - Taxation on SWPs
A Systematic Withdrawal Plan (SWP) lets you withdraw money regularly from your investments, usually from debt or hybrid funds. Each withdrawal includes:- Principal (Original Investment): Not taxed.
- Capital Gains: Taxed based on the holding period.
- Example:
If you withdraw ₹10,000/month from a debt fund and ₹1,000 is a gain, only the ₹1,000 is taxable. If you’re in the 20% tax bracket, you’ll pay ₹200 in taxes.
The tax rules for SIPs, STPs, and SWPs can be tricky, and poor planning can lead to unnecessary tax payments. AMFI-registered mutual fund distributors or advisors can help you understand these rules, create a tax-efficient investment strategy, and ensure your investments align with your goals. With expert guidance, you can minimize taxes and maximize the potential of your investments. Consulting a financial advisor can help you make the right investment choices for your future.
