POSTED BY August 18, 2012 10:31 am COMMENTS (5)

ONHi,

Most answers in forums have a “liable to tax” or “not liable to tax” depending on the SIP type, but I couldn’t find any information anywhere about the calculation.

Assumptions:

1. Pure equity SIP in India

2. Investing Rs. A annually (A/12 monthly) for n years, resulting in a return of rs.F at a CAGR of r%. F falls in the highest income tax bracket (30%) (if this is relevant)

3. n is about 10-15 years. Is it possible to invest for much longer periods for a retirement plan? (say 30-35 years)

Questions:

1. I heard there are no LTCG taxes (I think which apply to longer than 1 year) if it’s pure equity. Are there other taxes I need to consider?

2. I Couldn’t find a concrete relation for how much would remain after getting SIP returns. I am trying to get my financial planning done. Is it naive to assume that income tax is 30% of (F-nA)?

I calculated F as sum of a geometric progression: A+AR+…AR^(n-1) which is a*(R^n – 1)/(R-1), where R = 1+CAGR. (Assuming a CAGR of 12% or 0.12)

Thanks a lot for your help.

@Ashal,

I believe currently there’s no need to pay tax. I am not sure if it’ll change later. The bottomline being I need to maximize what I have at retirement and in SIP vs FD for 30-35 years, I find SIPs the most attractive. Even if taxes get introduced on SIP, I don’t expect them to be higher than FDs while SIPs offer much better returns.

Dear Anon, as you are not sure of the Tax rate after 20-25-35 years, what should be your priority now? Trying to build a large corpus or start worrying for the impact of taxation for all these years, although you are not going to redeem in between.

Thanks

Ashal

@Ashal,

I believe currently there’s no need to pay tax. I am not sure if it’ll change later. The bottomline being I need to maximize what I have at retirement and in SIP vs FD for 30-25 years, I find SIPs the most attractive. Even if taxes get introduced on SIP, I don’t expect them to be higher than FDs while SIPs offer much better returns.

Dear Anon, can you tell me what ‘ll be the Tax rate after this 5-10-15-20-35 years period for your SIP?

Thanks

Ashal

But there is no LTCG on equity funds ,so you dont need to worry about the tax part , this is as per current tax laws , tomm if after 5 yrs something changes and govt says that tehre will be tax on the profit part even on Equity investments started earliar , then you cant do much , but chances of that happening is almost nil .

Now next point is that , Equity part which has not completed 1 yr , will still be taxable , like if you have SIP for 10 yrs , so money invested 9th year onwards , will be taxable .