The headline 12% return on your SIP is gross. The tax department wants a slice. Here's exactly how much, and how SIP-specific units complicate things in ways you don't expect.
Disclaimer: this is general tax information for India as of FY 2024-25. Tax rules change. Verify with a CA before filing.
Two flavors of capital gains
When you redeem mutual-fund units, your gain is either:
- Short-Term Capital Gain (STCG) — held less than 12 months for equity funds, less than 24 months for non-equity funds
- Long-Term Capital Gain (LTCG) — held longer than the above thresholds
The rates differ dramatically.
Equity mutual funds (≥65% equity exposure)
| Type | Rate | Notes |
|---|---|---|
| STCG | 20% (raised from 15% in Budget 2024) | Flat rate, regardless of slab |
| LTCG | 12.5% | After ₹1.25 lakh annual exemption (raised from ₹1L in 2024) |
Debt mutual funds
After April 2023, debt-fund gains are taxed at your slab rate, regardless of holding period. The old indexation benefit was removed.
Hybrid funds
If a fund has > 65% equity → equity tax. Else → debt tax. Check the scheme document.
How SIPs make this interesting
Every SIP installment is a separate purchase with its own purchase date. When you redeem, the FIFO (first-in-first-out) rule applies — the oldest units get sold first.
Example: you've SIPed ₹10k/month for 14 months. You want to redeem ₹50k.
- The redemption draws from your first 5 installments (₹10k × 5).
- Of those, months 1 and 2 have been held > 12 months → LTCG.
- Months 3, 4, 5 have been held < 12 months → STCG.
So a single redemption can produce both STCG and LTCG. Most fund houses give you a capital-gain statement that shows the split. Use it.
The ₹1.25 lakh LTCG exemption — and how to harvest it
LTCG up to ₹1.25 lakh per year is tax-free for equity funds. Most retail investors never use this exemption fully.
A simple harvest strategy:
- At the end of each financial year, check unrealized LTCG.
- If close to or above ₹1.25 lakh of long-held gains, redeem just enough to bring the realized LTCG to ~₹1.25 lakh.
- Re-invest the proceeds the same day.
You've reset the cost basis without paying any tax. Done every year for 20 years, this is genuine compounding-of-the-exemption.
ELSS — the SIP with a tax twist
Equity-Linked Savings Scheme funds offer Section 80C deduction up to ₹1.5 lakh — but each SIP installment has a 3-year lock-in from its own purchase date. A 12-month ELSS SIP means the last installment unlocks at month 48, not month 12. Plan exits accordingly.
Dividend tax
If your fund pays dividends (now called IDCW — Income Distribution cum Capital Withdrawal), the dividend is added to your income and taxed at slab rate. The "growth" option avoids this entirely. Choose growth, almost always.
What CalcMaster does (and doesn't)
The SIP calculator shows gross returns. We don't subtract tax because:
- Your slab varies
- The split between STCG/LTCG depends on your redemption pattern
- Future rates are unknown (and changing)
Mentally subtract ~10–15% from the final corpus for a long-held, mostly-LTCG portfolio. That's your post-tax estimate.
The takeaway
The Indian tax system is friendlier to long-held equity than to short-term trading, and substantially friendlier than to debt funds. The SIP structure aligns naturally with this: longer holding → more LTCG → lower tax → bigger keep.
The ₹1.25 lakh annual LTCG exemption is the single under-used legal tax-saving for retail investors. Harvest it.
