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SIP Taxation: FIFO, Holding Period and Capital Gains When You Redeem Mutual Funds

Each SIP instalment is a separate tax lot. See FIFO redemption, equity-fund 12-month holding, 20% STCG/12.5% LTCG framework and worked lot calculations.

By CA Nikhil Gupta · 15 September 2026

Reviewed by CA Divyanshu Sengar · 19 September 2026

SIP Taxation: FIFO, Holding Period and Capital Gains When You Redeem Mutual Funds — Finin2min visual guide

Every instalment buys a separate number of units at that day’s NAV. When units are redeemed, the relevant lot-identification convention—commonly FIFO within the folio—determines which units are treated as sold, and each lot has its own holding period and cost.

Current rule and what decides the result

A SIP is only a purchase method; tax applies lot by lot. Each monthly allotment has its own acquisition date and cost, and partial redemptions must respect the applicable lot-identification/FIFO mechanics for mutual-fund units. The tax rate then depends on what type of fund the redeemed lot belongs to—equity-oriented, specified debt-heavy fund or another unit—and on the holding period of that specific lot. One redemption can therefore contain both long-term and short-term gains even though the investor thinks of it as one SIP.

Key rules to apply

  • Monthly SIP instalments create separate acquisition dates, quantities and costs.
  • Mutual-fund statements/capital-gains reports commonly apply first-in-first-out within the relevant folio for redemption lot identification.
  • For qualifying equity-oriented funds where section 111A applies, transfers on/after 23 July 2024 use the 20% STCG rate.
  • Qualifying section 112A LTCG is taxed at 12.5% on aggregate eligible gains exceeding ₹1.25 lakh, subject to STT and statutory conditions.
  • Debt-heavy specified mutual funds can be governed by section 50AA; other funds need their own category/holding analysis.
  • A switch or systematic withdrawal is still a redemption/transfer of units and creates capital-gains lots even when money is automatically reinvested.

One redemption, two holding periods

An investor puts ₹10,000 a month into an equity-oriented fund for 24 months and then redeems enough units to realise ₹1.8 lakh of cost under FIFO. The earliest lots may have crossed the long-term holding threshold while later lots have not. The AMC statement may show one redemption amount, but the tax working must split the units into long-term and short-term buckets by allotment date, then apply the relevant section 112A/111A treatment to each bucket.

SIP in a specified debt-heavy fund

A taxpayer starts a ₹20,000 monthly SIP in May 2026 in a fund that falls within the post-2026 specified-mutual-fund definition. After 30 months, she redeems part of the holding at a ₹55,000 gain. A long calendar holding does not necessarily create LTCG for the covered lots because the specified-fund rule can deem the gain short term. FIFO still determines which purchase lots were redeemed, but classification controls the tax character.

How to apply it step by step

  1. Download the capital-gains statement with purchase/allotment dates and units.
  2. Confirm the tax classification of each scheme for the relevant year.
  3. Apply FIFO/lot identification to the units actually redeemed.
  4. Calculate cost and gain for every redeemed lot.
  5. Split lots into applicable long-term/short-term categories.
  6. For qualifying equity lots, aggregate annual section 112A gains before using the threshold.
  7. Reconcile redemption totals with CAS/AMC/bank records and AIS where reported.
  8. Preserve statements because future redemptions continue from the remaining lot inventory.

Common mistakes and edge cases

  • Using the SIP start date for all units.
  • Dividing total investment by total units and ignoring lot dates.
  • Applying one tax rate to the entire redemption.
  • Assuming every non-equity fund has the same post-2026 treatment.
  • Forgetting that a switch is a redemption and therefore consumes FIFO lots.

FAQs

Is a SIP taxed differently from a lump-sum investment?

No special “SIP tax” exists; each SIP instalment creates a separate unit lot.

Can one redemption have STCG and LTCG?

Yes, because older and newer lots can fall into different holding-period buckets.

Which units are treated as sold first?

Apply the prescribed/accepted lot-identification method, commonly FIFO for mutual-fund redemption workings.

Does the SIP start date decide long-term status?

No. Each allotment date matters.

Does a fund switch trigger tax?

Yes, the old scheme is generally redeemed before the new scheme is purchased.

What is the best evidence?

AMC/CAS capital-gains statements plus transaction-level purchase and redemption records.

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Primary sources

Educational information only. Tax, legal, banking, investment and insurance outcomes depend on facts, dates and the instrument or policy in force. Obtain professional advice for material transactions.