How SIP redemptions are taxed: FIFO, with real numbers

The surprise

Here is a real SIP: ₹10,000 on the first business day of every month into HDFC Nifty 50 Index Fund (Direct, Growth), 36 instalments from October 2023 to September 2026. On 1 October 2026, at a NAV of 219.45:

The account is in the red. Now redeem ₹1 lakh. The capital gains statement will show a long-term gain of ₹6,803.

Nothing is wrong. That is how units leave a mutual fund folio.

First in, first out

Every SIP instalment buys its own batch of units at that day's NAV. When you redeem, fund houses and registrars sell the oldest units first, a rule called FIFO. Each batch's gain is its own sale value minus its own cost, and each batch is long-term or short-term on its own clock.

For an equity fund, a batch is long-term once it has been held for more than 12 months. Long-term gains are taxed at 12.5% above ₹1.25 lakh a year; short-term gains at 20%.

The 36 batches in this SIP

The index fund's NAV went from 186.04 at the first instalment to over 254 in late 2025 and January 2026, then fell to 219.45. So the oldest batches are in profit and the newer ones are not.

The October 2025 batch was bought on 1 October 2025 and has been held exactly 12 months on 1 October 2026. That is not more than 12 months, so it is still short-term.

What a redemption actually books

A ₹1 lakh withdrawal empties the nine oldest batches and dips into the tenth. Most of those were bought well below today's NAV, as low as 181.07 in November 2023, so the sale books a gain. Redeem more and the later, costlier batches pull the gain down. Only selling everything brings the whole loss onto your tax return.

What this means for tax

A partial redemption can use up your exemption even when you are down. The ₹6,803 gain is well inside the ₹1.25 lakh yearly allowance for long-term equity gains, so it owes no tax here. But it counts against that allowance, alongside any other equity gains you book in the same financial year.

You cannot pick which batches to sell. If you want to book the losses from your recent, costlier instalments, you have to sell your way through all the older ones first.

Losses are usable, with rules. A short-term loss can be set off against short-term or long-term gains; a long-term loss only against long-term gains. Unused losses carry forward for eight years, but only if you file your return on time. Our tax-loss harvesting guide has the details.

Selling to switch funds is a sale. Moving from this fund to another, even within the same fund house, runs exactly the same FIFO calculation. See why switching funds is a taxable event.

Two more SIP-specific points

• ELSS locks each instalment separately. Every SIP instalment into a tax-saving fund has its own three-year lock-in, so a three-year ELSS SIP is not fully free until six years after it began.
• The 12-month clock is per instalment. "My SIP is two years old" does not make every unit long-term. In this example, a full redemption would have produced short-term results on a third of the money.

Check your own

Your registrar's capital gains statement shows every batch. The capital gains tax calculator estimates the tax on a sale, and why SIP returns differ from fund returns explains the other number SIP investors find confusing.

Figures use the fund's published NAVs and current equity tax rates. This is a worked example, not tax advice.