Lesson 8 of 10 · SIP, STP and SWP — How They Work

SIP Taxation — STCG, LTCG, ELSS

Each SIP instalment is a separate purchase with its own holding period, so tax on redemption is worked out instalment by instalment. This lesson sets out the rules for equity-oriented schemes, schemes mainly in debt, and ELSS, with rates as of October 2026.

Fact-checked 8 October 20264 practice questions in the game

When tax arises

Capital-gains tax arises when units are redeemed, not when a SIP instalment is invested. Buying units is not a taxable event; the only levy at that point is stamp duty of 0.005% on the purchase.

Each instalment is a separate purchase, and its holding period runs from its own date, not from the date the SIP started. On redemption, units are taken as sold first-in-first-out: the units from the oldest instalment go first, then the next oldest.

Equity-oriented schemes

An equity-oriented scheme is one with at least 65% in listed domestic equity shares. As of October 2026, gains on its units held 12 months or less are short-term and taxed at 20%, under section 196 of the Income-tax Act, 2025 (Section 111A of the old 1961 Act).

Gains on units held more than 12 months are long-term and taxed at 12.5% on gains above ₹1.25 lakh a tax year, under section 198 (Section 112A of the old Act), without indexation. The ₹1.25 lakh is one limit across all such gains in the year, not a separate limit for each scheme. The rate was 10% before 23 July 2024. Securities transaction tax of 0.001% applies when equity-oriented units are redeemed.

Schemes mainly in debt, and other funds

A scheme with more than 65% of its assets in debt and money-market instruments is a specified mutual fund. Gains on its units bought on or after 1 April 2023 are treated as short-term and taxed at the investor's slab rate, whatever the holding period, with no indexation. This applies to each SIP instalment.

Funds that meet neither test, such as hybrids in between and gold funds, follow a third rule: gains are long-term if the units are held more than 24 months (more than 12 months if the units are listed) and taxed at 12.5% without indexation; otherwise the slab rate applies.

ELSS instalments

An Equity Linked Savings Scheme (ELSS) has a 3-year lock-in, and in a SIP each instalment carries its own lock-in from its own date. Units from later instalments unlock month by month.

The amount invested qualifies for deduction under section 123 of the Income-tax Act, 2025 (Section 80C of the old Act), up to ₹1.5 lakh, a limit shared with the other items that section covers, and only under the old tax regime.

Rules at a glance

Equity-oriented units held 12 months or lessShort-term gain, taxed at 20%Section 196, Income-tax Act, 2025 (old Section 111A); as of October 2026

Equity-oriented units held more than 12 monthsLong-term gain, 12.5% on gains above ₹1.25 lakh a tax year; no indexationSection 198 (old Section 112A); the rate was 10% before 23 July 2024

Specified mutual fund, units bought on or after 1 April 2023Slab rate, whatever the holding periodMore than 65% in debt and money-market instruments; as of October 2026

Other fundsLong-term if held more than 24 months (12 months if listed): 12.5% without indexation; otherwise slab rateAs of October 2026

ELSS3-year lock-in for each instalment; deduction up to ₹1.5 lakh, old regime onlySection 123, Income-tax Act, 2025 (old Section 80C)

Securities transaction tax0.001% on redemption of equity-oriented unitsAs of October 2026

Illustration

Lakshmi's ELSS SIP (illustrative)

Lakshmi invests ₹10,000 a month in an ELSS from April 2026 to March 2027, twelve instalments and ₹1,20,000 in all. Under the old tax regime, that amount counts towards the ₹1.5 lakh limit of section 123 along with any other eligible items. The April 2026 instalment completes its lock-in in April 2029 and the March 2027 instalment in March 2030, so the holding unlocks instalment by instalment over twelve months.

Worked example

A twelve-instalment SIP redeemed in one go (illustrative; rates as of October 2026)

A SIP in an equity-oriented scheme invests in the first week of every month from April 2025 to March 2026, twelve instalments. All the units are redeemed in the third week of September 2026.
Holding periods: the six instalments from April to September 2025 have been held for more than 12 months. The six from October 2025 to March 2026 have been held for 12 months or less.
Assume the gain on the six older instalments is ₹1,45,000 and on the six newer ones ₹20,000, and that there are no other capital gains in the tax year.
Long-term: 1,45,000 − 1,25,000 = ₹20,000 taxable. Tax = 12.5% of 20,000 = ₹2,500.
Short-term: tax = 20% of 20,000 = ₹4,000.
Total = 2,500 + 4,000 = ₹6,500, before surcharge and cess.

Result. Six instalments are long-term and six short-term, and the tax is ₹6,500 before surcharge and cess. Treating all twelve as held since April 2025 would give the wrong answer.

Key points

Tax on gains arises on redemption; each SIP instalment has its own holding period, and units are taken as sold first-in-first-out.
Equity-oriented units held 12 months or less: short-term, 20% (rates as of October 2026).
Equity-oriented units held more than 12 months: long-term, 12.5% on gains above ₹1.25 lakh a tax year, one limit across all such gains.
Specified mutual funds (more than 65% in debt and money-market instruments), units bought on or after 1 April 2023: slab rate, whatever the holding period.
Each ELSS instalment has its own 3-year lock-in; the deduction is under section 123, up to ₹1.5 lakh, old regime only.

Common misunderstandings

The holding period does not run from the date the SIP started: each instalment's period runs from its own date.
Holding a specified mutual fund for years does not make the gain long-term: for units bought on or after 1 April 2023 the slab rate applies whatever the holding period.
An ELSS SIP is not free three years after it starts: only the first instalment is; each later instalment has its own 3-year lock-in.

Questions people ask

Is tax payable each time a SIP instalment is invested?

No capital-gains tax arises on a purchase. Stamp duty of 0.005% is deducted from each instalment; tax on gains arises when units are redeemed.

Which units are treated as sold when part of a SIP holding is redeemed?

The oldest first. Units are taken as sold first-in-first-out.

Can one redemption produce both long-term and short-term gains?

Yes. In an equity-oriented scheme, units from instalments held more than 12 months give long-term gains and the rest give short-term gains.

What this lesson relies on

Income-tax Act, 2025: sections 196 and 198 (capital gains on equity-oriented units), section 123 (deduction), and the provision on specified mutual funds
Indian Stamp Act, 1899, as amended by the Finance Act, 2019 (stamp duty on mutual fund units from 1 July 2020)
Equity Linked Savings Scheme, 2005 (lock-in)

This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.