How a SIP Is Taxed
You have run a SIP for five years. Is the whole gain long-term when you sell?
5.2How a SIP Is Taxed2 of 2
2.1 — Arjun's two wrong assumptions
Arjun has been putting ₹20,000 a month into an equity fund for five years. He wants to withdraw some of it now, and he's carrying two assumptions into that conversation with his accountant. First: after five years, surely everything in there is long-term. Second: he gets to pick which units come out.
Both are wrong, and the second explains the first.
A SIP isn't one investment held for five years. It's sixty separate purchases made on sixty separate dates — and each one carries its own twelve-month clock, ticking from the day it was made, not from when the SIP itself began.
2.2 — The newest twelve months are always short-term — permanently
Follow that fact all the way through and you land on something that's true of every single SIP, forever.
Whenever you sell, the twelve most recent instalments haven't been held for more than twelve months. They're short-term, taxed at 20%, with zero exemption available against them.
| Three-year SIP, redeemed in full at month 36 | Treatment |
|---|---|
| Instalments 1 to 24 | Long-term — 12.5%, exemption applies |
| Instalments 25 to 36 | Short-term — 20%, no exemption |
That's not a quirk of a three-year SIP. Run it for twenty years and cash out everything — the last twelve instalments are STILL short-term. The proportion shrinks. The fact never changes.
2.3 — Arjun's second wrong assumption: he doesn't get to choose
He assumed he could nominate his oldest, most favourably taxed units to sell first. He can't. Equity mutual fund units are sold first-in, first-out, always.
The oldest units leave first, every time. That cuts two ways, and it's worth seeing both.
- **For a partial withdrawal, FIFO actually helps.** The units going out are your oldest — the ones most likely to be long-term. A small withdrawal from a long-running SIP can end up entirely long-term.
- **For a full redemption, FIFO changes nothing.** Everything goes, newest twelve instalments included, and the short-term slice is simply unavoidable.
- **You can't cherry-pick.** Deciding to realise only the long-term portion isn't a choice the rules give you.
One detail that matters for a partial sale: taking out half a lot takes half its units and half its cost, and whatever's left KEEPS its original purchase date. The clock doesn't restart. That's exactly how our calculator models it, because it's how a real fund actually works.
2.4 — Why a lumpsum plays by simpler rules
| Lumpsum | SIP | |
|---|---|---|
| Purchase dates | One | One per instalment |
| Holding periods | One | One per instalment |
| After a year | Entire gain long-term | Newest twelve instalments still short-term |
| Choice of units on sale | Not applicable | FIFO — oldest first |
None of this is an argument for lumpsum investing over a SIP. A SIP buys in at many different prices instead of one, which is the entire reason people use it — that's a question about risk, not tax. It just means the two aren't taxed the same way, and comparing them while ignoring that is comparing a gross number to a net one.
You can see both worked out with real numbers in the SIP calculator and the lumpsum calculator — each instalment taxed on its own clock, not the whole corpus treated as a single lump.
2.5 — The exemption, applied to a SIP
Chapter 1 already showed that the ₹1.25 lakh exemption is per person per financial year across ALL your equity gains, not per sale. On a SIP that has two real consequences.
- **It only ever applies to the long-term slice.** Those newest twelve instalments — the short-term portion — are taxed at 20% from the very first rupee. No part of the exemption reaches it.
- **It's shared with absolutely everything else.** Already realised long-term gains elsewhere this year? The SIP redemption draws on whatever's left of the shelter, not a fresh ₹1.25 lakh.
That second point is exactly why a clever-looking staged withdrawal plan is less clever than it seems. Splitting a redemption across two sales in the SAME financial year doesn't double the shelter. Splitting it across two financial years does — genuinely worth considering if the withdrawal isn't urgent.
2.6 — Where this leaves you, and where the course leaves off
Every calculator on this site shows the tax alongside the gross figure, because the gross figure isn't money anyone ever actually receives. The SIP calculator applies exactly what this chapter walked through, instalment by instalment.
Same limits from chapter 1 still apply: rules are known through FY2026-27 and applied forward because nobody knows the future ones; losses, set-off and carry-forward are real and out of scope; none of this is tax advice.
Arjun withdraws about a third of his holding. Because of FIFO, the units that actually leave are his oldest — every one of them long-term — and the bill is smaller than he'd feared. He also now understands that the money he put in THIS year isn't going anywhere for a while, which is roughly what his accountant has been trying to tell him since chapter 1.
That closes the course. You can read a company's three statements, judge the numbers in them against something that actually means something, see who owns the business and how its decisions really get made, follow a company from its first draft document all the way to its listing, and work out what you'd actually keep at the end of it. That's the whole of what this site does — and none of it needs to be a black box to you anymore.
Where to go next is whatever question you actually arrived with. The screener filters every company on exactly what you've just learned to read, and any company page carries the filings behind every single figure on it.
Key takeaways from this chapter
- 1.A SIP is not one investment. It is one separate purchase per instalment, each with its own twelve-month clock.
- 2.Each instalment turns long-term on its own first anniversary, not on the date you sell.
- 3.So the twelve most recent instalments are ALWAYS short-term at the point of sale, however long the SIP has run.
- 4.On a three-year SIP redeemed at month 36, instalments 25 to 36 are short-term at 20% and only 1 to 24 get the 12.5% rate.
- 5.Most online SIP calculators avoid this by not modelling tax at all, so their projected returns are gross figures.
- 6.Equity fund units are redeemed first-in, first-out. You cannot choose which units are sold.
- 7.FIFO helps on a partial withdrawal — the oldest and most favourably taxed units leave first.
- 8.Taking part of a lot leaves the remainder with its original purchase date. The clock does not restart.
- 9.A lumpsum has one purchase date and one holding period, so its entire gain is long-term after a year.
- 10.The ₹1.25 lakh exemption applies only to the long-term slice and is shared across all equity gains in the financial year.
Common questions
If I have run a SIP for five years, is the whole gain long-term?
No. Each monthly instalment has its own twelve-month holding period, counted from the date that instalment was invested. The twelve most recent instalments will not have been held for more than twelve months at the point of sale, so they are taxed as short-term gains at 20% however long the SIP as a whole has been running.
Can I choose which SIP units to redeem?
No. Equity mutual fund units are redeemed first-in, first-out, so the oldest units are sold first. That works in your favour on a partial withdrawal, because the oldest units are the most likely to qualify for the long-term rate, but it means you cannot selectively realise only the long-term portion.
How is a SIP taxed differently from a lumpsum?
A lumpsum has a single purchase date, so once a year has passed the entire gain is long-term and taxed at 12.5%. A SIP has one purchase date per instalment, so at any sale the newest twelve instalments are still short-term and taxed at 20% with no exemption against them.
Does the ₹1.25 lakh exemption apply to the short-term part of a SIP?
No. The exemption applies only to long-term equity gains. The short-term portion — the instalments held for twelve months or less — is taxed at 20% from the first rupee, and the exemption is also shared across every long-term equity gain you realise in that financial year.
If I withdraw part of a SIP, does the remaining money restart its holding period?
No. A partial redemption takes a share of the units and a matching share of the cost, and whatever remains keeps its original purchase date. Its twelve-month clock continues from when it was first invested.
Does splitting a withdrawal across two sales reduce the tax?
Not within the same financial year — the ₹1.25 lakh exemption is a single annual allowance, so a second sale draws on whatever the first left. Splitting a withdrawal across two financial years does give access to two years' allowances, which is a genuine consideration when the withdrawal is not urgent.
What this chapter rests on
- EquityTale tax engine — Equity rules for FY2026-27 as the site's calculators apply them: long-term beyond 12 months at 12.5% above a ₹1.25 lakh annual exemption, short-term at 20%. Last verified 23 August 2026.
- FIFO lot accounting — Equity mutual fund units are redeemed first-in, first-out. EquityTale's SIP calculator models each instalment as a separate lot with its own purchase date and cost basis.
Try it yourself
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Words used here
Facts in this chapter last reviewed 2026-09-12.
Educational explanation of filed data. EquityTale is not registered with SEBI as an investment adviser or research analyst, and nothing here is investment advice, a recommendation, or a price target. Figures are as filed and may contain errors — verify against the original filing before acting. See the full disclaimer.