Mutual Fund Taxation

Tax on SIP Investments: How Each Instalment Is Taxed

Last updated: Jul 17, 2026 3 min

Unlike a lump sum investment where there is a single purchase date and one holding period, a SIP treats each instalment as a separate investment with its own purchase date, purchase NAV, and holding period clock. Capital gains arise only at redemption, not when the NAV increases. At that point, the mutual fund applies the FIFO method: the earliest purchased units are redeemed first, and tax is calculated instalment-wise based on the gain and holding period of each batch.

Each instalment has its own holding period
A redemption from a long-running SIP may include both long-term and short-term units. The classification depends on each instalment’s individual holding period, not the age of the SIP overall.

FIFO determines redemption sequence
The earliest purchased units are redeemed first. Older units are more likely to qualify as long-term, while more recent instalments may still be short-term at the time of redemption.

Switching between schemes is treated as redemption
A switch from one scheme to another is processed as a redemption in the source scheme and a fresh investment in the destination scheme. Capital gains tax applies at the point of switching based on the holding period of the redeemed units.

LTCG exemption applies to total annual gains
For equity-oriented funds, the ₹1.25 lakh exemption applies to total long-term gains across all equity investments in a financial year, not per instalment or per SIP.

Fund Type	Holding Period	Tax Treatment
Equity funds	12 months or less	STCG at 20%
Equity funds	More than 12 months	LTCG at 12.5% above ₹1.25 lakh annual exemption
Debt funds (acquired on or after 1 Apr 2023)	Any period	Taxed at applicable slab rate

For debt investments made before 1 April 2023, earlier provisions may apply. Investors should verify with a tax professional.

A ₹5,000 monthly SIP starts in January 2024 and is fully redeemed in April 2026.

Instalment Date	Holding Period at Redemption	Classification
January 2024	More than 24 months	LTCG
March 2025	More than 12 months	LTCG
April 2025	12 months exactly	STCG (12 months or less; does not cross the more-than-12-months threshold)
March 2026	1 month	STCG

A single redemption may include both long-term and short-term gains. If total LTCG is ₹18,000 and STCG is ₹9,000: STCG tax = ₹1,800 (at 20%). LTCG tax = nil (below ₹1.25 lakh exemption). If the annual LTCG exemption has already been used elsewhere in the same financial year, LTCG is taxed at 12.5%.

"A SIP becomes fully long-term after one year."
Each instalment has its own holding period. Only those instalments that individually cross the 12-month threshold qualify as long-term.

"Portfolio returns reflect tax payable."
Portfolio returns show aggregate gains. Tax is calculated instalment-wise based on the holding period and gain per instalment.

DSP mutual fund schemes across equity, hybrid, and tax-saving categories are available for SIP-based investing. Investors can explore schemes on the DSP Mutual Fund schemes page.

Key Takeaways

Each SIP instalment is treated separately for tax purposes
FIFO determines which units are redeemed first
Equity funds: STCG at 20% (12 months or less), LTCG at 12.5% above ₹1.25 lakh (more than 12 months)
Switching between schemes triggers capital gains tax
The LTCG exemption applies to total annual gains across all equity investments, not per instalment

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Frequently Asked Questions

The LTCG exemption applies to total annual gains across all equity investments, not per instalment

Each instalment is evaluated separately based on purchase NAV, redemption NAV, and holding period.

Do all SIP units become long-term after one year?

No. Only instalments that individually cross the 12-month threshold qualify as long-term.

What is FIFO in SIP taxation?

FIFO means the earliest purchased units are redeemed first.

Does switching funds trigger tax?

Yes. A switch is treated as a redemption and capital gains tax applies based on the holding period of units redeemed.

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Disclaimer

DSP Mutual Fund – SEBI Registration No.: 036/97/7

This email/note is for information purposes only. The recipient of this material should consult an investment/tax advisor before making an investment decision. In this material DSP Asset Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including information developed in-house and is believed to be from reliable sources. The AMC nor any person connected does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Past performance may or may not be sustained in the future and should not be used as a basis for comparison with other investments. There is no assurance of any returns/capital protection/capital guarantee to the investors in above mentioned scheme.

For complete details on investment objective, investment strategy, asset allocation, scheme specific risk factors and more details, please read the Scheme Information Document, and Key Information Memorandum of the scheme available on ISC of AMC and also available on www.dspim.com.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.