SIP Taxation 2026: LTCG, STCG & the FIFO Trap
Every SIP installment creates a separate purchase lot. When you redeem, FIFO (First In, First Out) applies — your oldest units sell first. This means a single redemption can have both LTCG and STCG components.
How SIP Units Are Taxed
| Fund Type | Holding Period for LTCG | STCG Rate | LTCG Rate | LTCG Exemption |
|---|---|---|---|---|
| Equity MF (>65% equity) | > 12 months | 20% | 12.5% | Rs 1.25 Lakh/year |
| Debt MF | > 24 months | Slab rate | Slab rate | None (post 2023 rules) |
| Hybrid (equity-oriented) | > 12 months | 20% | 12.5% | Rs 1.25 Lakh/year |
| Hybrid (debt-oriented) | > 24 months | Slab rate | Slab rate | None |
The FIFO Trap — Explained
If you've been running an equity SIP for 18 months and redeem some units, FIFO means your oldest units (held >12 months) sell first as LTCG, while your newer units (held <12 months) are STCG. A single redemption generates two different tax treatments.
Practical Example
SIP of Rs 10,000/month in an equity fund for 24 months (total Rs 2.4 lakh invested). You redeem Rs 1 lakh worth of units. Under FIFO, the first units sold are from Month 1 (held 24 months = LTCG at 12.5% above Rs 1.25L exemption). If those don't cover the full Rs 1 lakh, Month 2 units sell next, and so on. All units held >12 months get LTCG treatment; units held ≤12 months get STCG at 20%.
Tax-Efficient SIP Strategies
- Avoid redeeming within 12 months of any SIP installment — STCG rate is 20% vs 12.5% LTCG
- Use the Rs 1.25 lakh annual LTCG exemption — consider booking gains annually to stay within the limit
- If you need partial redemption, check which units are >12 months old
- Use a consolidated capital gains statement from your AMC to track lot-wise holding periods
- Debt fund gains are always taxed at slab rates — no benefit from holding longer (post-2023 rules)