The convenience offered by SIPs (systematic investment plans) and their many advantages including rupee-cost averaging have led them to emerge as a preferred mode of investment among Indians. Having said this, most investors also look to optimise their SIP investments from a taxation point of view to earn higher tax-adjusted returns. Read on to learn tax optimisation strategies for SIPs that can help you grow your total, tax-adjusted SIP returns in 2024.

How are SIP investments taxed in 2024?

One must understand the taxation of different categories of SIP investments before delving into optimising SIPs for taxation. Here’s how the two main categories of mutual fund schemes are taxed in India:
• Debt SIP investments: If you have purchased SIP units on or after 1st April 2023, the gains are considered short-term regardless of the holding period and are taxed as per your income tax slab rate.

• Equity SIP investments: If you invest in an equity SIP investment and sell your fund units after holding on to them for more than a year, the gains are deemed as “long-term capital gains” (LTCG) and are taxed at 10% (LTCG tax rate). If the gains are held for less than a year, they are taxed at 15% as “short-term capital gains” (STCG) tax.

Strategies for tax-efficient SIP investing in 2024

• Invest in ELSS funds to avail tax benefits: One of the best ways to increase your tax-adjusted returns is by investing in an ELSS (equity-linked savings scheme) fund. Section 80C of the Income Tax Act helps you save up to ₹1.5 lakh in taxes every financial year.

• Hold your equity fund units for more than a year: Your gains will qualify as LTCG if you choose to hold on to them for more than a year and will be taxed at 10%. STCGs, as mentioned earlier, are taxed at 15%. You can, therefore, save up on tax by holding on to your equity fund units for more than a year.

• Switch to the “growth option” of funds: You can reinvest the gains earned from the fund back into the fund if you opt for the “growth option”. Choosing the growth option helps investors benefit from capital appreciation in the long run and also helps them save tax if their gains qualify as LTCG.

• Harvest tax losses using “cost averaging”: Also called “rupee-cost averaging”, cost averaging is a very important benefit of SIP investments. SIPs help you purchase more mutual fund units when their prices are lower and fewer units when the prices are high. This results in your mutual fund units having different purchase prices. You can therefore use tax-loss harvesting to your advantage to save money in taxes.

In summary, you can rely on four strategies to optimise your SIP investment from a taxation point of view – Investing in ELSS funds, holding your equity units for more than a year, choosing the “growth option”, and tax-loss harvesting. You must also compare mutual funds using a mutual funds SIP calculator to considerably increase your tax-adjusted returns.