Tax on SIP Redemptions (FIFO Explained)

Investors often assume a SIP redemption is one simple transaction. It isn't. If you've been investing monthly for three years and redeem now, you're not selling "three years' worth of one investment" — you're selling dozens of separate mini-investments, each with a different purchase date, a different NAV, and potentially a different tax treatment. FIFO is the rule that decides the order.

What FIFO actually means

FIFO — First In First Out — is an accounting rule applied automatically by your fund's registrar (CAMS or KFintech). It says: whichever units you bought first, get sold first, whenever you place a redemption request. You don't get to pick and choose which instalment's units to sell — the system does it in strict chronological order.

A worked example

Say you started a SIP of ₹10,000/month in an equity fund from January 2023. By September 2026, you've made 45 instalments. You decide to redeem units worth ₹1,00,000.

Since your redemption of ₹1,00,000 will consume the oldest units first (FIFO), it will draw mostly from instalments that have crossed the 12-month mark — meaning most of this redemption is likely to be long-term. But if you redeem a much larger amount that eats into instalments from the last 12 months, part of the same redemption becomes short-term. One redemption, two tax treatments, split automatically by FIFO.

Why this matters for equity funds (2026 rules)

• Units held over 12 months → Long-Term Capital Gains (LTCG). Gains up to ₹1.25 lakh in a financial year are exempt; above that, taxed at 12.5%.
• Units held 12 months or less → Short-Term Capital Gains (STCG), taxed at 20% flat, no exemption threshold.

Because FIFO always redeems the oldest units first, the longer your SIP has been running relative to the amount you're redeeming, the more likely your gains qualify for the friendlier LTCG treatment. This is one quiet reason to let SIPs run long before large withdrawals — not just for compounding, but for tax efficiency too.

Debt funds and other categories

FIFO applies the same way to debt funds, hybrid funds, and any other mutual fund category — the ordering rule doesn't change. What changes is the tax rate and holding-period threshold applied to each instalment, based on the fund category and prevailing tax rules for that asset class. Always check the current holding-period rule for the specific fund type before assuming LTCG applies.

How to check this yourself

1. Pull your Capital Gains Statement from CAMS/KFintech (or your distributor) for the financial year
2. It will show each instalment/lot separately, with purchase date, sale date, and gain/loss per lot — already split by FIFO and holding period
3. Use this statement directly for your ITR — don't try to recalculate manually unless you're double-checking

Practical takeaways

• You cannot choose which instalment to redeem — FIFO decides automatically
• A single redemption request can straddle both LTCG and STCG depending on how far back your SIP goes
• Redeeming a smaller amount from a long-running SIP is more likely to land entirely in LTCG territory
• Always get the Capital Gains Statement — don't estimate tax by hand for SIP redemptions

For the difference between how gains are taxed depending on holding period more broadly, see our piece on LTCG vs STCG on mutual funds. And if you're deciding whether to pause or continue a SIP before a big redemption, our article on SIP vs lumpsum investing covers the timing side of that decision.