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.
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
A 30-month SIP with a partial redemptionMs Reddy started a monthly SIP of Rs 10,000 in an equity mutual fund 30 months ago and has made 30 instalments, each creating a separate lot. She now wants to redeem units worth Rs 1,20,000. Under FIFO, this redemption is deemed to consist of the units from her earliest instalments, instalments 1 through roughly 12 (the first 12 months' worth, approximately, depending on NAV movements), all of which were purchased more than 12 months ago and therefore qualify for long-term capital gains treatment. Even though Ms Reddy might think of this redemption as 'a bit from everywhere', for tax purposes it is treated as entirely coming from her oldest, long-term lots, resulting in LTCG taxation (with the applicable exemption threshold and rate for equity LTCG) rather than a mix of short-term and long-term gains.
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.
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.