According to the Association of Mutual Funds India’s (AMFI) report in January 2024, there were 7.91 crore SIP accounts, which was a record high compared to December 2023’s 7.63 crore.

From this data, it’s evident that most of the mutual fund investors invest via SIP, considering stock market penetration in India is 8 crore as of January 2024. 

With so many investors, it’s crucial to understand how taxation works in case of an SIP. Let’s start from scratch. 

What is an SIP?

SIP stands for a Systematic Investment Plan. Investors can set a specific amount, that will be automatically deducted at specific intervals from their bank accounts and invested into a mutual fund. 

SIPs are available for funds across different categories such as Equity, Debt, Gold Funds, etc. 

Taxation In The Case Of Lumpsum

Let’s look at how a lumpsum investment would be taxed first.

Assume you invested Rs 1,00,000, 5 years back. 

What would happen, is this Rs 1 lakh would be divided by the Fund’s NAV (Net Asset Value), to determine how many units of the fund should be allocated. 

Let’s assume, the NAV was Rs 100. Hence, 1000 units would be allocated. 

Now, after 5 years, let’s say your NAV is currently Rs 180. So your fund value is Rs 1,80,000 (Rs 180 * 1,000 Units). 

Your gains in this case is [(Rs 180 – Rs 100) * 1000 Units] = Rs 80,000. And this would be subject to tax. 

Taxation in case of SIP

SIP taxation follows a different approach. Since the NAV of a fund grows over time or can have fluctuations if it’s an equity fund, the NAV at which one purchases can vary. 

Let’s take an example:

Assume you made a SIP of Rs 5,000 each month in an equity-oriented fund. 

• In January 2023, NAV of 100, hence (5000/100) 50 units were allotted. 
• In February 2023, NAV of 105, hence (5000/105) 47.62 units were allotted.
• In March 2023, NAV of 110, hence (5000/110) 45.45 units were allotted.   

Let’s assume, you sold this in February 2023 and the NAV was 150. SIPs follow the first-in first first-out (FIFO) method of taxation. It means that the SIP that’s made first will be sold first. Followed by the rest.  

Basically, in this case, January’s SIP will be sold first, followed by February’s SIP, and so on. Now, another important thing to note is the tenure of investment. Here, only investments made in January and February are over a year. March’s SIP is less than a year old. 

Therefore, LTCG will be applicable on January and February’s SIP. Whereas March’s SIP would be subject to STCG. 

So what would be the final gains? 

• January 2023 – [(150-100)*50] = Rs 2,500
• February 2023 – [(150-105)*47.62] = Rs 2,143
• March 2023 – [(150-110)*45.45] = Rs 1,818

Hence, Rs 4,643 will be subject to LTCG and Rs 1,818 will be subject to STCG. 

Bonus: There will be no tax on this Rs 4,643 because LTCG up to Rs 1 lakh on equity-oriented is exempted from tax. Meanwhile, the Rs 1,818 will be subject to a flat 15% + cess and surcharge due to STCG.