SIP vs Lump Sum: How income tax on capital gains is calculated? Know expert calculations

Systematic Investment Plan (SIP) and lump sum are two forms of mutual fund investment. While the objective of both is to get returns on investment, their returns and tax on capital gains are calculated differently. In a lump sum, you make a one-time investment, and the return is counted from Day 1. In a SIP, you make payments at fixed intervals. The returns are counted from the day of the SIP investment.

So, even if you make the same amount of investment in a year through lump sum and SIP in two mutual funds schemes and get returns at the same rate in each of them, returns are higher in lump sum since the returns are earned on the entire amount from Day 1.

It is not the case in SIP, where returns are calculated from the day the SIP is made.

E.g., if you make a Rs 60K lump sum investment and make 12 SIPs of Rs 5,000 each in two different mutual fund schemes, where returns are 12 per cent, the lump sum investment will become Rs 67,200, while the SIP investment will be Rs 64,047 after one year.

The simple reason is that you invest Rs 60,000 in a lump sum in one go and the same amount in instalments in SIP.

Similarly, when it comes to tax calculation on lump sum and SIP investments, the tax rules for short-term and long-term capital gains are the same for both; they are counted in different ways for each of them.

E.g., if you make a Rs 1 lakh lump sum investment today and sell all the units after 12 months, all your gains will be considered long-term, and you will be taxed at 10 per cent above the tax exemption limit of Rs 1 lakh.

In SIP, capital gains are calculated on a first-in, first-out (FIFO) basis.

It means that if you have 12 monthly SIPs and you try to redempt the fund's NAVs after one year, only your first SIP will attract long-term capital gains tax and will be taxed at 10 per cent, while the rest of the SIPs will attract short-term capital gains and will be taxed at a 15 per cent rate.

Will my mutual fund gains be taxed as per my salary income bracket?

It is important to know that gains from mutual funds have nothing to do with your salary bracket.

You are given a Rs 1 lakh tax exemption on long-term gains (in lump sum and SIP both), and after that, long-term gains are taxed at a 10 per cent rate.

SIP vs lump sum: Income tax on gains

Nehal Mota, co-founder and CEO, Finnovate, says that in a lump sum investment, the calculation of long-term capital gains is fairly straightforward.

Citing an example, she says, you buy 10,000 units of ABC Fund at Rs 23.70 NAV and sell them at Rs 38.40 after 16 months.

The table below captures the calculation.

Chart Courtesy: Finnovate 

Nehal says further, how would this differ if instead of lump sum, the investor had bought it as an SIP and sold it in lump sum.

Assume that the investor buys SIP units of 1,300 units at Rs 21.50 in the first month, 1,500 units at Rs 22.60 and 1,600 units at Rs 23.10.

After 15 months, he sells 4,000 units at Rs 29.60. The capital gains will be calculated using the FIFO method as under.

Chart Courtesy: Finnovate