SIP taxation in India

A fund counts as equity-oriented for tax purposes when it holds at least 65% in domestic equity. That covers most large-cap, mid-cap, small-cap, flexi-cap, index and ELSS funds.

Both rates are before applicable surcharge and cess. The ₹1.25 lakh exemption is an annual allowance across all your long-term equity gains, not per fund and not per folio.

That allowance is genuinely useful and widely wasted. If you have unrealised long-term gains and have not used the allowance this year, redeeming up to ₹1.25 lakh of gain costs nothing in tax. Doing that annually, and reinvesting, resets your cost base upward — often called tax harvesting. Worth discussing with a CA rather than improvising.

For units in a specified debt mutual fund bought on or after 1 April 2023, gains are treated as short-term regardless of how long you held them, and are added to your income and taxed at your slab rate. Indexation is gone.

Practically: a 30%-slab taxpayer keeps 70% of a debt fund's gain, with no relief for how long the money was invested. That removed the main tax advantage debt funds held over fixed deposits, and it is why the choice between the two is now much closer to a plain rate comparison.

Units bought before that date follow the earlier regime. If you hold both, your statement will reflect the split.

Each instalment is a separate purchase with its own date and cost. When you redeem, units are taken first-in, first-out — oldest first.

Take a SIP that ran for 18 months and is then partly redeemed. The first six instalments are more than twelve months old, so those are long-term. The last few are not, so those are short-term. One redemption, two tax treatments, and the split depends on exactly how many units you sold.

Two consequences worth planning around. A partial redemption sells your oldest and most tax-favoured units first, whether or not that is what you wanted. And waiting a few months can reclassify a chunk of gain from 20% to 12.5%, which on a large redemption is material.

This is also why a daily or weekly SIP creates real administrative pain: ten years of daily instalments is around 2,500 separate purchase lots, each with its own date and cost.

ELSS funds add a deduction under Section 80C, capped at ₹1.5 lakh a year — but only under the old tax regime. The new regime, the default since FY 2023-24, has no 80C, so an ELSS investment gives a taxpayer on the new regime no deduction at all.

On the way out, ELSS is an equity fund. Because each instalment is locked for three years, every redemption is automatically long-term: 12.5% above the ₹1.25 lakh allowance.

The ELSS calculator models both regimes so you can see which applies to you.

• Switching counts as a redemption. Moving between schemes — even within the same fund house, even between plans of the same scheme — is a sale and a purchase, and triggers tax.
• Dividends (IDCW) are taxed at your slab as income, with TDS above the threshold. For most people an SWP is more tax-efficient, because only the gain portion of each withdrawal is taxable rather than the whole payout.
• Losses can be set off. Short-term losses set off against both short- and long-term gains; long-term losses only against long-term gains. Unabsorbed losses carry forward eight assessment years, provided you filed on time.
• STT applies on equity fund redemptions at a small rate, deducted automatically.
• No TDS on resident mutual fund capital gains — you compute and pay it yourself, which is why an unexpected advance-tax liability catches people out. NRIs are subject to TDS.