Income Tax

Selling SIP Mutual Fund Units: Why FIFO Decides Which Units Are 'Sold' First for Tax

CA Nikhil Gupta·June 2026·Reviewed 17 June 2026·6 min readIncome Tax

Every SIP instalment you invest creates a separate 'lot' of units, each with its own purchase date and price. When you redeem only part of your holding, the question of which lots get sold first is not up to you, it is decided by a specific accounting convention that directly determines whether your gain is short-term or long-term.

Finin2min answer: Mutual fund redemptions are matched to your oldest units first (FIFO) under CBDT Circular No. 704 (1995) as extended to electronic/demat holdings by Circular No. 768 (1998). This is not optional — it decides whether a partial redemption comes out long-term or short-term, and the applicable FY 2025–26/AY 2026–27 rules (Sections 111A/112A) govern the resulting tax rate.

Why a Single Mutual Fund Holding Is Really Many Small Lots

A Systematic Investment Plan results in a fresh purchase of units every month (or whatever frequency is chosen), each at the NAV prevailing on that date. Over several years, a single SIP can create dozens or even hundreds of distinct 'lots' of units, each with its own acquisition date and acquisition price (NAV at purchase). For capital gains purposes, each lot is treated as a separate acquisition.

The FIFO Rule

First-In-First-Out: When units are redeemed from a folio that has multiple lots acquired on different dates, the units are deemed to be sold on a First-In-First-Out basis, meaning the earliest-acquired units (the oldest lots) are considered sold first, regardless of which specific units the investor might subjectively think of as being 'redeemed'. This convention applies per folio and per scheme (units of the same scheme held under the same folio are treated together for this purpose).

Why FIFO Matters for Your Tax Bill

Because FIFO determines which lots are deemed sold, it directly affects the holding period of the units being sold, which in turn determines whether the resulting gain is a short-term capital gain (STCG) or long-term capital gain (LTCG), each taxed differently for equity-oriented funds. If your earliest SIP instalments are now long-term (held beyond the equity threshold of one year) while your most recent instalments are still short-term, a partial redemption will, under FIFO, draw from the oldest (long-term) units first, until those are exhausted, before touching the more recent (short-term) units.

Worked Example

How This Plays Out Over Time

As an investor continues a long-running SIP and periodically makes partial redemptions, FIFO means that each redemption progressively consumes the oldest remaining lots first. Investors who redeem small amounts periodically (for example, for rebalancing or partial profit-booking) while continuing fresh SIP instalments will generally find that, for a long time, their redemptions draw from increasingly 'aged' (long-term) lots, while their newest instalments remain short-term until they age past the one-year threshold themselves.

Where to See the Lot-Wise Breakup

Mutual fund Capital Gains Statements (provided by registrars like CAMS/KFintech, or available through fund house portals) typically show a lot-wise breakup of each redemption, listing the specific purchase date, purchase NAV, units redeemed from that lot, sale NAV, and the resulting gain/loss for each lot, already computed on a FIFO basis. This statement is the most reliable source for filling in the capital gains schedule of the ITR, rather than attempting to compute this manually.

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Planning a partial redemption from a long-running SIP?Download your fund's Capital Gains Statement to see the FIFO-based lot breakup before you redeem.

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2026 Accuracy & Decision Check

FIFO ledger: the tax engine behind SIP redemptions

Every SIP purchase is its own tax lot. The redemption quantity should be matched to oldest available units first, then each lot classified by holding period and fund tax regime. Do not calculate gain by comparing total SIP investment with redemption proceeds as one blended lot.

Decision / evidence controls

Export CAS/AMC statement with all purchases, reinvestments and switches.
Apply FIFO separately by scheme/folio as applicable.
Use lot-specific cost and transfer-date tax rates.
Carry forward loss only if return-filing conditions are met.

Worked example: Example: redeeming 500 units can consume 300 long-term units and 200 short-term units, creating two separate gain calculations.

Edge case: Edge case: a switch is generally a redemption from one scheme and acquisition of another; it resets the tax lot in the new scheme.

Which law/year?

FY 2025–26 / AY 2026–27 redemptions remain governed by the Income-tax Act, 1961 (Sections 111A, 112, 112A for the resulting LTCG/STCG rates). Income of the tax year beginning 1 April 2026 falls under the Income-tax Act, 2025 instead — check the current section numbering before applying an old-Act reference to a post-1-April-2026 transaction.

Primary-source checks

Frequently Asked Questions

Does FIFO apply separately to each mutual fund scheme, or across my entire portfolio? ▼

FIFO is applied at the level of each individual scheme and folio combination, not across your entire portfolio. If you hold the same scheme across two different folios (for example, one direct plan folio and one regular plan folio), each folio's holdings are typically tracked separately for FIFO purposes, since they are technically distinct holdings even if the underlying scheme is the same.

Can I choose to redeem my newer (short-term) units first instead of the oldest ones, if that works out better for my taxes? ▼

No, the FIFO convention is not optional or investor-selectable for mutual fund redemptions; the oldest lots are deemed sold first by the registrar's systems regardless of investor preference. If you want to manage the tax character of your gains (for example, deliberately realising long-term gains within an exemption threshold), this needs to be planned around the FIFO order of your existing lots, such as by timing redemptions to coincide with when specific older lots cross the long-term threshold.

If I switch between regular and direct plans of the same scheme, does that reset the holding period for FIFO purposes? ▼

A switch from one plan/scheme to another (for example, regular to direct plan of the same fund) is generally treated as a redemption of the original units and a fresh purchase of the new units, which means a new acquisition date is established for the units received from the switch. This effectively starts a new holding period for those units in the new plan, distinct from the holding period of the original units, so switching can affect the FIFO ordering and holding periods within the destination plan/folio.

Source and review trail

Use the current official instrument, portal or regulator publication before acting.

Primary category: Income Tax
Official starting point: www.incometax.gov.in