Topic 8 of 9~5 min read

SIP Taxation

Definition

SIP investments are subject to capital gains tax when units are redeemed. The tax treatment depends on the type of fund (equity vs debt), the holding period (short-term vs long-term), and the applicable tax rates. Each SIP installment is treated as a separate investment for tax purposes.

In Simple Words

In SIP, every monthly installment is a separate purchase. When you redeem, the holding period is calculated from the date of each installment, not the SIP start date. This means some installments may be taxed as short-term gains while others as long-term gains. For equity funds, gains up to ₹1.25 Lakh/year are tax-free (LTCG exemption). Understanding SIP taxation helps in tax-efficient redemption planning.

Real-Life Scenario

Ananya started a ₹10,000/month equity SIP in January 2023. She redeems all units in March 2024: Jan 2023 installment: Held for 14 months → LTCG (long-term, >12 months) Feb 2023 installment: Held for 13 months → LTCG Mar 2023 installment: Held for 12 months → LTCG Apr 2023 - Mar 2024 installments: Held for <12 months → STCG LTCG (Jan-Mar 2023 units): Taxed at 12.5% above ₹1.25L exemption STCG (Apr 2023 onwards): Taxed at 20% Tip: If Ananya waited till April 2024 to redeem, one more month of installments would have converted from STCG to LTCG, saving tax.

Key Points to Remember

Each SIP installment has its own holding period for tax calculation

Equity funds: LTCG after 12 months, STCG within 12 months

Debt funds: All gains taxed at income tax slab rate (from April 2023)

Equity LTCG: 12.5% above ₹1.25L annual exemption

Equity STCG: 20% flat rate

ELSS SIP: 3-year lock-in per installment, qualifies for 80C deduction

First-in-first-out (FIFO) method for redemption tax calculation

Tax harvesting: Redeem and reinvest to utilize annual LTCG exemption

Formula

Equity Fund Tax (FY 2025-26):
STCG (held < 12 months): 20%
LTCG (held > 12 months): 12.5% above ₹1.25L exemption

Debt Fund Tax (from April 2023):
All gains: Taxed at investor's income tax slab rate
No indexation benefit

Frequently Asked Questions

Test Your Knowledge

1 questions to check your understanding

Question 1 of 1Score: 0/0

How is the holding period calculated for SIP investments in equity funds?

Summary Notes

Each SIP installment has its own holding period for tax purposes

Plan redemptions to maximize LTCG and minimize STCG

Use annual LTCG exemption of ₹1.25L through tax harvesting

ELSS SIP: Tax saving on investment + tax on gains at redemption

Debt fund SIP gains now taxed at slab rate — no indexation benefit