How SIP Mutual Fund Redemptions Are Taxed in India: FIFO, STCG vs LTCG, and Practical Examples (AY 2026-27)

Why SIP Redemptions Are Taxed Differently Than Lump-Sum Investments

When you invest through a Systematic Investment Plan (SIP), each monthly installment buys mutual fund units at the prevailing NAV on that date. This means every SIP installment is treated as a separate purchase for tax purposes.

When you redeem (sell) units, you're not selling one block of units bought on a single date. You're selling units that were acquired across multiple months, each with its own purchase date and cost. The tax treatment of each batch of units depends on how long those specific units were held.

This is where most SIP investors get confused. A partial redemption from a fund where you've been investing via SIP for two years might trigger both short-term and long-term capital gains in the same transaction.

The FIFO Rule: First In, First Out

When you redeem units from a mutual fund, the Income Tax Department requires you to follow the FIFO (First In, First Out) method. The units you purchased first are deemed to be sold first.

Here's why this matters with SIPs:

Say you started a monthly SIP of Rs 10,000 in an equity fund in April 2024. By March 2026, you've made 24 installments. If you redeem units worth Rs 1,00,000 in March 2026:

• Units from your April 2024 installment are sold first (held ~24 months = long-term)
• Then May 2024 units, then June 2024 units, and so on
• If the redemption consumes units up to your April 2025 installment, those units were held for less than 12 months = short-term

The fund house applies FIFO automatically when processing your redemption. Your capital gains statement will show exactly which lots were sold and the corresponding gains.

Tax Rates for AY 2026-27 (FY 2025-26)

The tax treatment depends on the type of mutual fund and the holding period of each lot of units being redeemed.

Equity Mutual Funds (Equity Allocation 65% or More)

This includes equity diversified funds, ELSS, equity index funds, and most equity-oriented hybrid funds.

The Rs 1.25 lakh LTCG exemption is an aggregate annual limit across all equity investments (stocks + equity mutual funds). Gains up to this threshold in a financial year are tax-free.

Debt Mutual Funds (Equity Allocation Below 35%)

This includes liquid funds, overnight funds, short-duration funds, corporate bond funds, gilt funds, and most debt-oriented funds.

For units purchased on or after April 1, 2023, debt fund gains are always taxed at your slab rate regardless of how long you held them. There is no long-term capital gains benefit and no indexation available.

Hybrid Funds (Equity Allocation 35% to 65%)

Worked Example: Equity SIP Partial Redemption

Let's trace through a realistic scenario.

Setup: Priya invests Rs 15,000 per month via SIP in an equity mutual fund starting January 2025.

Redemption: On April 20, 2026, Priya redeems 300 units at NAV Rs 180.

Applying FIFO:

Lot 1 — January 2025 units (100 units)

• Holding period: Jan 15, 2025 to Apr 20, 2026 = ~15 months (Long-term)
• Purchase cost: 100 x Rs 150 = Rs 15,000
• Sale value: 100 x Rs 180 = Rs 18,000
• LTCG: Rs 3,000

Lot 2 — February 2025 units (101.35 units)

• Holding period: Feb 15, 2025 to Apr 20, 2026 = ~14 months (Long-term)
• Purchase cost: 101.35 x Rs 148 = Rs 15,000
• Sale value: 101.35 x Rs 180 = Rs 18,243
• LTCG: Rs 3,243

Lot 3 — March 2025 units (96.77 units)

• Holding period: Mar 15, 2025 to Apr 20, 2026 = ~13 months (Long-term)
• Purchase cost: 96.77 x Rs 155 = Rs 15,000
• Sale value: 96.77 x Rs 180 = Rs 17,419
• LTCG: Rs 2,419

Lot 4 — April 2025 units (1.88 units to reach 300 total)

• Holding period: Apr 15, 2025 to Apr 20, 2026 = ~12 months (Long-term)
• Purchase cost: 1.88 x Rs 160 = Rs 301
• Sale value: 1.88 x Rs 180 = Rs 338
• LTCG: Rs 37

Total LTCG from this redemption: Rs 8,699

Since Priya's total equity LTCG for the year is below Rs 1.25 lakh, she pays zero tax on this redemption. Had her total equity LTCG across all investments exceeded Rs 1.25 lakh, the excess would be taxed at 12.5%.

Now imagine she had redeemed in November 2025 instead. Her January 2025 units would be long-term (held ~10 months — wait, that's less than 12 months), so they'd be short-term too. In fact, all units would be STCG at 20% since no installment would have completed 12 months.

Timing your redemptions around the 12-month mark of your earliest SIP installments can materially reduce your tax liability.

SWP (Systematic Withdrawal Plan) Taxation

A Systematic Withdrawal Plan works like an SIP in reverse — you withdraw a fixed amount monthly. Each SWP withdrawal is a redemption event, and FIFO applies separately to each one.

The key insight: if your SIP has been running for over 12 months (for equity funds) before you start an SWP, your earliest units will be long-term. As months pass, each SWP withdrawal eats through progressively newer units. Eventually, the SWP may start consuming short-term units if it catches up to units purchased less than 12 months ago.

If you're using SWP for regular income, structuring your withdrawal amount to stay within the long-term units can keep your entire withdrawal taxed at the lower LTCG rate.

How to Track Cost Basis Across SIP Installments

Manually tracking the purchase date and NAV of each SIP installment is impractical if you've been investing for years. Here's where to find accurate data:

1. Consolidated Account Statement (CAS): Request from CAMS or KFintech. It lists every transaction with dates, NAVs, and units.
2. AMC Capital Gains Statement: Most fund houses generate this annually and make it available on their website or app. It shows realized gains with FIFO already applied.
3. AIS (Annual Information Statement): The Income Tax Department's AIS now shows mutual fund transactions reported by RTAs. Cross-check this with your fund house statements.

49Tax can pull your capital gains data and automatically compute the STCG and LTCG breakdown across all your SIP redemptions, saving you from manual lot-by-lot calculations.

Reporting SIP Gains in Your Income Tax Return

If you have capital gains from mutual fund redemptions, you must file ITR-2 (not ITR-1). This applies even if your only other income is salary. See ITR-1 vs ITR-2: Which Form Should You File? for details.

In ITR-2, report your gains under Schedule CG (Capital Gains):

• Equity fund STCG goes under Section 111A (taxed at 20%)
• Equity fund LTCG goes under Section 112A (taxed at 12.5% above Rs 1.25 lakh)
• Debt fund gains go under "Income from Other Sources" at your slab rate

You need to report the aggregate STCG and LTCG amounts — you don't need to list each SIP lot individually in the return. However, keep your capital gains statements as supporting documentation.

For a broader overview of how capital gains across different asset types work, see Capital Gains Tax on Stocks & Mutual Funds: ITR-2 Guide.

Common Mistakes to Avoid

Ignoring STCG in partial redemptions. Even a long-running SIP can generate STCG if you redeem more units than the long-term lots cover. Always check the capital gains statement before assuming your entire redemption is tax-free.

Not accounting for SIP date vs debit date. The purchase date for tax purposes is the date units are allotted (reflected in the CAS), not the date your bank was debited. There can be a 1-2 day difference that matters around the 12-month boundary.

Forgetting switch transactions. Switching from one fund to another within the same AMC is a redemption from the first fund and a fresh purchase in the second. Each switch triggers capital gains on the exited fund.

Double-counting the Rs 1.25 lakh exemption. The LTCG exemption is shared across all equity investments — listed shares and equity mutual funds combined. If you've already exhausted it through stock sales, your equity fund LTCG will be fully taxable.

Key Takeaway

Every SIP installment creates a separate tax lot with its own holding period. On redemption, FIFO applies, meaning your oldest units are sold first. The single most impactful tax-saving move for SIP investors is to time large redemptions so that the maximum number of units cross the 12-month threshold (for equity funds), converting what would be 20% STCG into 12.5% LTCG or even tax-free gains under the Rs 1.25 lakh exemption. Before redeeming, check your AMC's capital gains statement to see exactly how your units will be classified.