How your mutual fund SIPs would be taxed under the new income tax structure

The tax on short term capital gains and long term capital gains on equity mutual funds have increased after the announcement made in the budget by the Finance Minister Nirmala Sitharaman. The short term capital gain tax has been hiked to 20% from 15% whereas long term capital gain tax has been hiked to 12.5% from 10%.

The Finance Minister increased the exemption limit for LTCG tax from Rs 1 lakh to Rs 1.25 lakh in a financial year.

Mutual fund investors now wish to know how their SIPs will be taxed under the new tax structure announced in the budget.


For calculation of tax, each instalment of SIP made in a mutual fund scheme is treated as a separate entry/investment. All mutual fund investments follow a First-in-first-out policy. Following the FIFO method, in case of redemption the amount is deducted from the first investment made.

First in First out (FIFO)

FIFO is a commonly practiced method of computing tax on capital gains realised during sale of mutual fund units. Under this method, it is assumed that the units that are sold were purchased first.

“The increase in exemption limit for Long Term Capital Gains tax from Rs 1 lakh to Rs 1.25 lakhs is a welcome change. While the changes in rates for LTCG and STCG were not anticipated, the markets will take them in their stride,” said Venkat Chalasani, Chief Executive, AMFI.

“The hike in long-term capital gains (LTCG) tax to 12.5% directly impacts mutual fund investors by eroding their post-tax returns. This could influence investment behaviour, potentially shifting focus towards short-term gains to avoid the higher tax. Consequently, equity mutual fund performance might be affected as a portion of returns is now subject to a higher tax rate. Investors may also consider alternatives to equity funds, impacting the asset allocation landscape,” commented Sonam Srivastava, Founder and Fund Manager at Wright Research.