Taxation of SIPs (FIFO method)

Taxation of Systematic Investment Plans (SIPs) in India follows the same capital gains framework as lump-sum mutual fund investments, but with a critical difference in lot tracking: each SIP instalment creates a separate lot of units with its own acquisition date and purchase NAV. When units are redeemed, the tax computation must identify which lot is being redeemed and what the holding period of that lot is. The income-tax rules and mutual fund industry practice both apply the FIFO (First In, First Out) method, meaning the earliest-purchased units are treated as sold first. This creates a situation where a SIP investor who redeems a portion of their holdings may have a mix of long-term and short-term units in the same redemption transaction.

Tax advice disclaimer. This article is for educational reference only and does not constitute professional tax or financial advice. Tax law changes frequently and individual circumstances vary widely. Readers should consult a qualified Chartered Accountant or tax adviser before making any investment or tax-filing decision.

What is FIFO and why it applies

FIFO is a method of determining which units are sold when a redemption does not specify a particular lot. Under FIFO, the units purchased earliest are deemed to be sold first. The Income Tax Act 1961 does not explicitly prescribe FIFO for mutual fund units; however, Regulation 36 of the SEBI (Mutual Funds) Regulations 1996 and AMFI’s guidelines require AMCs to apply FIFO when issuing the capital gains statement. The CBDT has also tacitly accepted FIFO through its guidance on capital gains reporting.

The alternative method – specific identification (choosing which lot to sell) – is theoretically available to investors who can identify specific units, but mutual fund transaction systems generally implement FIFO automatically unless the investor provides specific redemption instructions tied to particular folios or lots (which most systems do not support at the unit level).

Each SIP instalment is a separate lot

A SIP of Rs 10,000 per month in an equity mutual fund creates 12 separate lots in a year, each with:

• A distinct number of units (computed as Rs 10,000 / NAV on the date of allotment).
• A distinct acquisition date (the allotment date, not the SIP registration date).
• A distinct cost of acquisition (the NAV on the allotment date).

The allotment date is typically two to three business days after the SIP execution date (NAV cut-off rules apply: investments received before 3 pm on a business day get that day’s NAV; those after 3 pm get the next day’s NAV for liquid/overnight funds; for equity funds, the cut-off is 3 pm).

STCG versus LTCG determination in a SIP

For an equity-oriented mutual fund SIP, the LTCG threshold is 12 months from the date of allotment. A unit allotted on 15 January 2023 becomes long-term on 16 January 2024.

Example:

Monthly SIP of Rs 10,000 from January 2023 to December 2023 (12 instalments). Partial redemption of 200 units on 1 February 2024.

Under FIFO:

• The January 2023 lot is redeemed first: allotment was 15 January 2023; redemption on 1 February 2024 = held 382 days = more than 12 months = LTCG.
• If 200 units exceed the January 2023 lot size, the February 2023 lot is next: allotment 15 February 2023; redemption 1 February 2024 = held 351 days = less than 12 months = STCG.

The same redemption may therefore produce both LTCG and STCG depending on lot sizes.

Worked FIFO calculation

Setup:

Redemption of 150 units on 5 February 2024:

Under FIFO: 100 units from January 2023 (held 387 days, LTCG) + 50 units from February 2023 (held 355 days, STCG).

Gain calculation:

• 100 units (LTCG): Sale NAV Rs 130 – Cost Rs 100 = Rs 30 per unit = Rs 3,000 total LTCG.
• 50 units (STCG): Sale NAV Rs 130 – Cost Rs 102 = Rs 28 per unit = Rs 1,400 total STCG.

Tax:

• LTCG: Rs 3,000 (added to total Section 112A gains; taxable above Rs 1,25,000 threshold at 12.5%).
• STCG: Rs 1,400 at 20% (Section 111A) = Rs 280.

SIP in debt mutual funds (post-April 2023)

For SIPs in specified mutual funds (debt funds) acquired on or after 1 April 2023, the FIFO principle still applies for identifying which lot is redeemed, but the holding-period test for LTCG classification is irrelevant: all gains are STCG at slab rates regardless of the holding period. The FIFO method is still needed to compute the cost of acquisition for each lot.

ELSS SIP and the lock-in

For ELSS SIPs, FIFO applies but the AMC will not allow redemption of units that are within their three-year lock-in period. In practice, for an ELSS SIP started in January 2022, the January 2022 units become redeemable on 15 January 2025; the February 2022 units on 15 February 2025; and so on. The FIFO order aligns with the lock-in expiry sequence.

SIP and grandfathering

For SIP instalments allotted before 1 February 2018, the grandfathering provision applies to each such lot individually. The 31 January 2018 closing NAV of the scheme is the FMV for each pre-2018 lot, and the deemed cost is computed lot-by-lot.

Capital gains statement

Fund houses and Registrar and Transfer Agents (RTAs such as CAMS and KFintech) provide annual capital gains statements that enumerate each lot redeemed during the year, the corresponding acquisition date, acquisition NAV, sale NAV, holding period, and gain/loss classification. These statements pre-apply FIFO and classify gains as STCG or LTCG. They also incorporate grandfathering adjustments for pre-2018 units. Investors should use these statements when filing ITR-2 or ITR-3 and reconcile them with the Annual Information Statement (AIS).

STP and FIFO

Systematic Transfer Plans (STPs), where a fixed amount is periodically transferred from one fund to another, are treated as a series of partial redemptions and fresh purchases. The same FIFO logic applies to the source fund’s lot identification.

See also

• SWP taxation
• STP taxation
• Equity mutual fund taxation in India
• STCG on equity MFs (Section 111A)
• LTCG on equity MFs (Section 112A)
• Equity MF grandfathering (31 January 2018)
• ELSS and Section 80C deduction
• Debt mutual fund taxation (post-April 2023)
• MF switch as a taxable event
• Annual Information Statement
• AIS/TIS mapping for MF transactions
• ITR-2
• Capital gains tax in India

References

1. Income Tax Act 1961, Section 2(42A) – short-term capital asset.
2. Income Tax Act 1961, Section 2(29A) – long-term capital asset.
3. SEBI (Mutual Funds) Regulations 1996, Regulation 36 – capital gains statement requirement.
4. AMFI guidelines on capital gains computation and FIFO.
5. CBDT guidance on holding-period computation for SIP units.
6. Income Tax Act 1961, Section 55(2)(ac) – grandfathering.
7. Income Tax Act 1961, Section 112A – LTCG.
8. Income Tax Act 1961, Section 111A – STCG.