How Mutual Fund SIP Gains Are Taxed in India (2025-26)
Published 30 June 2026 · Investing
Ananya in Mumbai has been running a ₹10,000/month SIP for 5 years. She needs ₹5 lakh for a down payment on a flat and wants to redeem from her mutual fund. Her corpus is now ₹8.2L — she invested ₹6L and made ₹2.2L in gains. Before she redeems, she needs to know exactly how much tax she will pay. The answer depends on one key rule: the FIFO principle and the 12-month holding period for each instalment.
How Each SIP Instalment Has Its Own Tax Clock
Ananya has made 60 monthly SIP payments of ₹10,000 each. Each payment bought units at the NAV on that particular date. Each lot of units has its own cost basis and its own 12-month LTCG clock. When she redeems, the Income Tax rules apply FIFO (First In, First Out) — the oldest units go first.
Units from month 1 (60 months ago): held 60 months → LTCG. Units from month 12 (48 months ago): held 48 months → LTCG. Units from month 49 (12 months ago): held exactly 12 months → LTCG (the threshold is >12 months, meaning 12 months + 1 day). Units from month 50 onwards (less than 12 months): STCG.
Since Ananya is redeeming after 5 full years, and FIFO applies, the first units redeemed will be her oldest — all from months 1 to 48+ depending on how much she redeems. For a ₹5L redemption from an ₹8.2L corpus, she will redeem roughly 61% of her units. The oldest units — well past 12 months — will go first. Her redemption is almost entirely LTCG territory.
Ananya's Actual Tax Calculation
Ananya redeems ₹5L. The invested cost of those units (FIFO, oldest first): approximately ₹3L (since her oldest 30 payments at ₹10,000 each = ₹3L invested, now grown to approximately ₹5L).
Gain on redemption: ₹5,00,000 − ₹3,00,000 = ₹2,00,000 in LTCG.
LTCG exemption for FY2026: ₹1,25,000. Taxable LTCG: ₹2,00,000 − ₹1,25,000 = ₹75,000. Tax: ₹75,000 × 12.5% = ₹9,375.
Total tax on Ananya's ₹5L redemption: ₹9,375. On a ₹2L gain, that is an effective tax rate of 4.7%. Compare that to FD interest: the same ₹2L in interest at the 30% bracket costs ₹62,400 in tax (including 4% cess). The tax advantage of equity SIP over FD is real and substantial.
Mutual Fund Tax Rates at a Glance (2025-26)
| Fund Type | Holding Period | Tax Rate | Note |
|---|---|---|---|
| Equity MF | <12 months | 20% (STCG) | — |
| Equity MF | ≥12 months | 12.5% LTCG above ₹1.25L | First ₹1.25L/yr exempt |
| Debt MF | Any | Slab rate | No LTCG benefit post-2023 |
| ELSS | ≥3 years | 12.5% LTCG | 80C benefit on contribution (old regime) |
ELSS: Double Benefit Under the Old Tax Regime
ELSS (Equity Linked Savings Scheme) is an equity mutual fund with a 3-year lock-in per instalment. Under the old tax regime, Section 80C allows deductions up to ₹1.5L per year — meaning a ₹1.5L annual ELSS SIP saves ₹45,000 in tax for a 30% bracket taxpayer. At redemption (after 3 years), LTCG applies the same as any equity fund: 12.5% above ₹1.25L exemption. Under the new tax regime, Section 80C does not apply — ELSS becomes identical to a regular equity fund from a tax perspective, only with an unnecessary 3-year lock-in.
Run this for your own numbers
Run SIP Returns After Tax →What Most People Get Wrong
They calculate SIP returns without factoring in LTCG. A ₹10L corpus with ₹6L invested over 10 years has ₹4L in LTCG. The first ₹1.25L is exempt. The remaining ₹2.75L is taxed at 12.5% = ₹34,375 in total tax. On a ₹4L gain, that is an 8.6% effective tax rate — modest, but worth knowing before you compare the SIP's net return to an FD's pre-tax rate. After LTCG, a 12% equity SIP nets approximately 11.1% — still dramatically better than a 7% FD that nets 4.9% after 30% slab tax. But do the comparison correctly, post-tax on both sides.
Frequently Asked Questions
How are SIP gains taxed in India in 2025-26?
Equity mutual fund SIP: gains from units held 12+ months = LTCG taxed at 12.5% above ₹1.25L annual exemption. Gains from units held less than 12 months = STCG taxed at 20%. Debt mutual fund SIP gains: taxed at your income slab rate regardless of holding period (post-2023 budget change).
Does each SIP instalment have a separate tax holding period?
Yes — each monthly SIP instalment is treated as a separate investment. The 12-month LTCG clock starts separately for each instalment. When you redeem, units are sold on a FIFO (first-in, first-out) basis, so the oldest units (most likely held 12+ months) are sold first.
What is the LTCG exemption for mutual funds in 2025-26?
₹1.25 lakh per financial year (changed from ₹1L in Budget 2024). LTCG on equity mutual funds above ₹1.25L is taxed at 12.5% (changed from 10% in Budget 2024). No indexation benefit is available.
Is ELSS SIP better than regular equity fund SIP for tax?
ELSS gives Section 80C deduction up to ₹1.5L under the old regime — effectively saving 20–30% tax on the invested amount. But ELSS has a 3-year lock-in per instalment. Under the new tax regime, Section 80C does not apply, making ELSS no different from a regular equity fund.
How do I minimise tax on SIP redemptions?
Redeem only up to ₹1.25L LTCG per year (exempt). Redeem from oldest units first (FIFO applies automatically). Harvest losses from one fund to offset gains in another. Avoid redeeming within 12 months — STCG at 20% is significantly higher than LTCG at 12.5%.
Have you calculated your SIP's after-tax return — and compared that number to the FD interest rate after your tax slab?