How SIP Returns Are Taxed (LTCG Explained)

SIP Calculator Hub · Updated October 2026

The current equity LTCG rules

For equity mutual funds, gains on units held longer than 12 months are long-term capital gains. LTCG is taxed at 12.5%, with the first ₹1.25 lakh of such gains in a financial year exempt. These rates apply to units sold on or after 23 July 2024.

Gains on units held for 12 months or less are short-term capital gains, taxed at 20%. This is why holding period matters so much.

The rules at a glance (tax year 2026-27)

From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act. The section numbers changed; the rates did not.

Health and education cess of 4% applies on top of the tax. For high incomes, the surcharge on these equity gains is capped at 15%.

Why each instalment is taxed separately

Here's the subtlety unique to SIPs: every monthly instalment buys units on a different date, so each instalment has its own holding-period clock. When you redeem, the units bought more than a year ago are long-term; the recent ones may still be short-term.

The units you sell are always matched first-in, first-out: the oldest units go first. So a SIP redemption is rarely all-LTCG or all-STCG. It is a blend, and a proper calculation handles each tranche separately. Most online calculators don't; ours is built to.

A worked example

Suppose a redemption in one financial year produces ₹3,00,000 of long-term gains and ₹20,000 of short-term gains, and you have no other capital gains that year:

The ₹1.25 lakh exemption is per person per financial year, across all your equity funds and shares combined, not per fund. The income-tax rebate for lower incomes cannot be used against tax on these special-rate gains, so even a small earner can owe it.

Units bought before February 2018

Long-term gains on equity were tax-free before April 2018. To protect those older gains, units bought on or before 31 January 2018 use a "grandfathered" cost: the higher of what you paid and the NAV on 31 January 2018, capped at your sale price. Only growth after that date is taxed. The tax-harvesting calculator applies this automatically, unit by unit.

Losses, set-off and reporting

• Short-term losses can be set off against both short-term and long-term gains.
• Long-term losses can be set off only against long-term gains.
• Unused losses can be carried forward for 8 years, but only if you file your return by the due date.
• Report every redemption in the capital-gains part of your return, even when the gain is within the ₹1.25 lakh exemption. Your consolidated account statement and the Annual Information Statement list the transactions.
• Resident investors have no TDS on redemption gains. TDS of 10% applies only to IDCW (dividend) payouts above ₹10,000 a year from a fund. NRIs face TDS on gains.

Using the exemption well

The ₹1.25 lakh annual LTCG exemption resets each financial year and cannot be carried forward. Some investors deliberately book long-term gains up to the limit each year and reinvest, which raises their cost base without paying tax. Done every year, this can save several thousand rupees a year on a large portfolio. Watch exit loads, and remember that reinvesting restarts the 12-month clock on the new units.

The key takeaway: always look at your post-tax corpus, not the headline number. The gap is real money.

This is general information about the rules as they stand, not tax advice. For your own return, consult a chartered accountant or tax professional.

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