Understanding SIP Taxation in India (2026) – LTCG, STCG & The FIFO Trap

The Golden Rule: Every SIP = A Separate Investment

This is where most people get confused.

When you invest Rs 10,000 on January 1st and another Rs 10,000 on February 1st, the tax department doesn't see it as "one investment of Rs 20,000."

It sees two separate investments, each with its own:

• Purchase date
• Purchase price (NAV)
• Holding period

Why does this matter? Because the holding period determines whether you pay 12.5% tax or 20% tax.

The Two Types of Capital Gains

Long-Term Capital Gains (LTCG)

• Holding period: More than 12 months
• Tax rate: 12.5% (+ 4% cess)
• Exemption: First Rs 1.25 lakh per year is TAX-FREE

Short-Term Capital Gains (STCG)

• Holding period: 12 months or less
• Tax rate: 20% (+ 4% cess)
• Exemption: None. Every rupee is taxed.

The FIFO Trap: Why Your 18-Month SIP Isn't Fully "Long-Term"

Here's where it gets interesting.

FIFO = First In, First Out

When you redeem units, the oldest units are sold first. Sounds fair. But here's the catch:

Example Scenario

You start a Rs 10,000 monthly SIP in January 2025. After 18 months (June 2026), you redeem everything.

A Real-World Tax Calculation

Let's put numbers to this.

Assuming equal gains per SIP (Rs 1,667 each):

*Within Rs 1.25 lakh annual exemption

Total tax: Rs 4,000 + cess

If all Rs 30,000 had qualified for LTCG, your tax would have been Rs 0 (under exemption). That's Rs 4,000 lost because of timing.

How to Minimize SIP Tax

1. Wait for the Full Cycle

If you've been doing SIP for 18 months, wait 6 more months. Then ALL your units become long-term.

2. Partial Redemptions

Need money urgently? Redeem only the older units (FIFO does this automatically). Leave the recent ones to mature.

3. Use the Rs 1.25 Lakh LTCG Exemption Smartly

Every financial year, you get Rs 1.25 lakh LTCG tax-free.

Strategy: Instead of one big redemption, spread it across financial years.

4. Avoid Redeeming in December

SIPs done in December of the previous year are exactly 12 months old in December — right on the borderline. Wait till January to be safe.

Tax Reporting: What You Need to Do

Good News: No TDS

Unlike FDs, there's no TDS on equity mutual fund redemptions for Indian residents. You receive the full amount.

But You Still Have to Report

Even if your LTCG is within the Rs 1.25 lakh exemption, you must report it in your ITR.

Where to report:

• Schedule CG (Capital Gains) in ITR-2 or ITR-3
• Use Form 16A or your AMC's Capital Gains Statement

Documents to keep:

• AMC statements showing purchase dates & NAVs
• Redemption statements with sale price
• Holding period calculations

Quick Reference: SIP Tax Cheat Sheet

Common Mistakes to Avoid