How are SIP returns taxed, and is a SIP tax-free?

A SIP is not taxed as a SIP. Each instalment buys units of a fund. When you sell those units, the gain is taxed by the rules for that kind of fund, instalment by instalment. Nothing is taxed while you stay invested, and a SIP is not tax-free.

A SIP (systematic investment plan) means investing a fixed amount at regular intervals, usually monthly. Each instalment buys units at that day's NAV, the price of one unit. A SIP gives no deduction under section 123 (the old Section 80C) unless the fund is an ELSS or a notified mutual fund pension fund. Even then, it counts only under the old tax regime. An ELSS (equity-linked savings scheme) locks each purchase in for three years.

The rules below are those of the Income-tax Act, 2025 as amended by the Finance Act, 2026, for the tax year 2026-27.

Are SIP returns taxable?

Yes, but only when you sell units, and only on the gain. A SEBI-registered mutual fund's own income is exempt under Schedule VII of the Act, so trades inside the fund create no tax for you.

A switch to another scheme counts as a sale of the old units and a purchase of new ones. The new units' holding period starts on the switch date.

No TDS is deducted when a resident redeems units. TDS is tax deducted at source, before the money reaches you.

The one fixed tax-free slice is long-term gains on units of an equity-oriented fund held more than 12 months. It covers up to ₹1,25,000 in a tax year, one allowance per person. An equity-oriented fund is one with at least 65% in shares of Indian listed companies. This article covers resident investors. For NRIs, see how mutual funds are taxed for NRIs in India.

How is each SIP instalment taxed?

Each instalment is taxed on its own. Each is a separate purchase with its own NAV and allotment date, so it has its own cost and holding period.

The holding period is how long you have owned a unit, from the day you bought it to the day you sell it. It decides whether a gain is short-term or long-term.

A Specified Mutual Fund is one with more than 65% in debt and money market instruments.

So one sale from a SIP can mix short-term and long-term gains, because the instalments were bought on different dates.

Which instalments are sold first?

When you sell part of a SIP, your earliest instalments are sold first. Each is taxed by how long it was held.

For units held in demat form, through a depository, the Act itself says cost and holding period are worked out first-in-first-out. For units held with the fund house, scheme documents such as one flexi cap fund's say redemptions are done first in, first out.

Your capital gains and loss report across all mutual funds is available from MF Central, the registrars' common platform.

Does an exit load apply to a SIP?

It can, on the recent instalments only. An exit load is a fee some funds charge if you sell before a set time has passed since buying.

Exit loads run from each unit's own allotment date. One fund's scheme document charges 1% if units are redeemed or switched out up to 3 months from allotment, and nothing after that. Stopping a SIP sells nothing, so it carries no exit load; see how to stop or pause a SIP.

How are equity fund SIPs taxed?

With securities transaction tax (STT) paid, gains on units of an equity-oriented fund held 12 months or less are short-term and taxed at 20%.

With STT paid, gains on units of an equity-oriented fund held more than 12 months are long-term. Only the part above ₹1,25,000 in the tax year is taxed, at 12.5%.

An equity-oriented fund invests at least 65% of its money in equity shares of domestic companies listed on a recognised stock exchange. The 65% is measured as the annual average of the monthly averages of the opening and closing figures.

Cess is an extra 4% charge on the tax itself, added to both. A surcharge is a further charge on the tax once total income passes ₹50 lakh. On tax under sections 196, 197 and 198, it is capped at 15% under both regimes.

The ₹1,25,000 is one allowance per person per tax year, not one per fund. It is shared with any gains from listed shares sold in the same year.

For a resident individual whose other income is below the tax-free limit, the unused part of that limit is set against the gains first. Only the rest is taxed at the rates above.

Units of an equity-oriented fund bought before 1 February 2018 have a special cost. The cost for tax is the higher of what you paid and the NAV on 31 January 2018 (but not more than your sale price). This is section 90(7) of the Income-tax Act, 2025.

Short-term equity gains sit in section 196 (the old Section 111A) and long-term equity gains in section 198 (the old Section 112A). See the category pages for equity funds and ELSS funds.

How are debt fund SIPs taxed?

For Specified Mutual Fund units acquired on or after 1 April 2023, the gain is taxed at your slab rate whatever the holding period. The slab rate is the rate for your income bracket.

A fund also counts as a Specified Mutual Fund if it invests 65% or more in units of such a fund. Debt means loans to governments, banks or companies, in the form of bonds and similar paper.

A debt SIP that started before 1 April 2023 holds two kinds of lots. Units of a Specified Mutual Fund bought before that date and held more than 24 months are long-term, taxed at 12.5% under section 197. Units bought before that date and held 24 months or less are taxed at slab rates.

The 15% cap on surcharge covers equity and long-term gains, not debt fund gains taxed at your slab rate.

Tax on debt mutual funds goes deeper, and should you start a SIP in a debt fund looks at the fund itself.

How are hybrid, gold and international fund SIPs taxed?

The tax on hybrid, gold and international fund SIPs depends on what the fund actually holds during the year. Check the latest documents or ask a tax adviser.

A fund of funds invests in units of other funds. Gold, silver and non-debt international funds of funds are not Specified Mutual Funds, whenever bought. See the category pages for hybrid funds, gold funds and international funds.

Does a SIP save tax under section 123?

No SIP saves tax under section 123 just for being a SIP. Only an ELSS SIP or a notified mutual fund pension fund counts, and only under the old tax regime.

Section 123 covers amounts paid in the tax year on items in Schedule XV, the Act's list of items that qualify. The limit is ₹1,50,000 a tax year across all items together, for individuals and Hindu Undivided Families, under the old regime only. The default regime does not allow it; see the features of the new tax regime.

In an ELSS, each instalment is locked in for three years from its own allotment date. Lock-in means you cannot sell during that period. For what happens when it ends, see your ELSS lock-in period is over.

In this example, an ELSS SIP of ₹12,500 a month runs from April to March. That is ₹1,50,000 paid in the tax year. It uses the whole section 123 limit, under the old regime only.

The tax saved under the old regime only, with no surcharge, is ₹31,200 at a 20% slab: ₹30,000 plus ₹1,200 cess. At a 30% slab, under the old regime only, it is ₹46,800: ₹45,000 plus ₹1,800 cess.

Koshex helps you with the ELSS and section 123 decision each financial year. Two guides compare the options: the tax-saving deductions guide and PPF, ELSS and NPS for tax saving.

Worked example: selling a SIP that has run for 16 months

The SIP in this example is ₹8,000 on the 5th of each month from 5 June 2025 to 5 September 2026. That is 16 instalments, 7 in 2025 and 9 in 2026, and ₹1,28,000 invested. All units are sold on 25 September 2026.

The June to September 2025 instalments (4 × ₹8,000 = ₹32,000) were held more than 12 months. The 5 September 2025 one was held 12 months and 20 days. The October 2025 to September 2026 instalments (12 × ₹8,000 = ₹96,000) were held 12 months or less. The 5 October 2025 one was held 11 months and 20 days.

The gains are assumptions, not forecasts: ₹5,000 of long-term gain on the older instalments and ₹6,000 of short-term gain on the newer ones.

No surcharge is assumed; one applies only if total income is above ₹50 lakh. Because every unit is sold, the order of sale does not change these numbers.

What if your SIP is at a loss?

A loss on units you sell is a capital loss. It can be set against capital gains, but never against salary, interest or any other kind of income. A short-term capital loss can be set off against short-term or long-term gains. A long-term loss can be set off only against long-term gains.

An unused capital loss can be carried forward for at most eight tax years, only if the return was filed by the due date.