Mutual fund taxation in India — LTCG, STCG, and the FIFO rule nobody explains

A ₹10,000-a-month equity SIP, run for 20 years at 12% return, builds a corpus of ₹91,98,574. The tax on that corpus at redemption isn’t a single number. It’s 240 separate calculations, sorted FIFO, with 229 of them taxed at one rate and 11 at another.

Indian mutual fund taxation is more granular than most articles let on. The “12.5% LTCG on equity” headline is true but incomplete — it skips the lot-by-lot mechanics that decide which gains qualify for that rate at all, which sit at the higher STCG rate, and which never qualify because the fund type doesn’t get long-term treatment in the first place.

The mechanics matter more than the rates. Rates change with Finance Acts — currently 12.5% for equity LTCG, 20% for equity STCG, slab for debt — but the structural rules underneath stay roughly stable. Once you understand the mechanics, plugging in next year’s rates is arithmetic.

This article walks through the structure. The calculator runs the arithmetic.

The FIFO lot rule (the part most articles miss)

When you redeem a SIP — partly or fully — each monthly installment is treated as a separate tax lot with its own purchase date. The Income Tax Act doesn’t care that all 240 installments went into the same scheme. It cares when each one was bought, because that decides each lot’s holding period.

Lots are redeemed FIFO. First in, first out. Sell ₹2 lakh worth of units from a 5-year-old SIP and you’re selling the oldest installments first.

This has a quiet consequence. The lots you sell first are the ones that compounded the longest, which means they’re the ones with the largest individual gains. Redeeming early in the SIP’s life skews you toward selling the most-appreciated lots, which can shape your tax bill in non-obvious ways.

For a ₹10,000-a-month equity SIP redeemed at month 240:

• Months 1–229 are LTCG lots (each has compounded ≥12 months by redemption)
• Months 230–240 are STCG lots (each has compounded under 12 months)

The earliest lot — month 1 — grew from ₹10,000 to roughly ₹98,926 over 240 months. That single lot has ₹88,926 of LTCG. The last LTCG-qualifying lot — month 229 — grew from ₹10,000 to ₹11,200 in 12 months. That lot has ₹1,200 of LTCG.

Sum across all 229 LTCG lots and you get ₹67,92,109 of LTCG gains. Sum across the 11 STCG lots and you get ₹6,465 of STCG gains. The split isn’t even — early lots dominate by gain size even though late lots are more numerous on a per-installment basis.

Try the calculator with tax enabled and the breakdown panel shows you exactly this split, lot by lot, for any SIP scenario.

Holding-period thresholds by fund type

The first decision the tax code makes is whether a lot is “long-term” at all. That depends entirely on the fund category.

Equity funds (≥65% equity allocation): 12 months. This is the headline category — Nifty 50 index funds, large-cap, mid-cap, small-cap, flexicap, equity-hybrid funds that maintain ≥65% equity. A lot held for 12+ months qualifies for LTCG treatment. Less than 12 months is STCG.

ELSS: 12 months for tax purposes, but per-installment 3-year lock-in. Same 12-month LTCG threshold as regular equity, but each SIP installment is independently locked for 36 months from its purchase date. You can’t redeem an ELSS installment before 36 months, even though for tax purposes it would qualify as LTCG after 12.

Debt funds (purchased post 1 April 2023): no LTCG threshold at all. Under Section 50AA, all gains on debt mutual funds purchased after this date are deemed short-term regardless of holding period. They’re taxed at the investor’s slab rate. The pre-2023 LTCG-with-indexation benefit is gone. This is one of the most significant tax changes in recent Indian personal finance and it gets undercovered.

Hybrid funds: depends on equity allocation. ≥65% equity → treated as equity. Under 35% equity (debt-heavy hybrids) → Section 50AA debt treatment. The 35%–65% middle band has its own complication that brackt’s calculator treats as debt-style for simplicity.

Gold ETFs (listed): 12 months. Long-term gains taxed at 12.5% without indexation. Short-term at slab rate. The 12-month threshold applies because Gold ETFs are listed units, treated like other listed non-equity instruments.

Gold FoFs (fund-of-funds): 24 months. This is the easy-to-miss one. Gold fund-of-funds — unlisted units, even though the underlying is gold — require a 24-month holding period to qualify for LTCG. Most retail “gold mutual funds” sold by AMCs are FoF structures, not direct ETFs. If you’ve been investing in what you think of as a gold mutual fund through your AMC, you probably hit the 24-month threshold, not the 12-month one. brackt’s calculator distinguishes between gold-etf and gold-fof for exactly this reason.

The mechanic — holding period defines the tax treatment, and the threshold differs by fund category — is the structural rule. The exact thresholds and rates may shift with future Finance Acts. The rule that “each installment is its own lot, and each lot has its own holding period” doesn’t.

Rates that apply, currently

Holding period decides which rate applies. The rates themselves, as of FY 2026-27 (Finance Act 2025; Budget 2026 left them unchanged):

Equity LTCG (Section 112A): 12.5% on gains above ₹1.25 lakh exemption per financial year. The exemption is per assessee, per FY — not per lot, not per fund, not per lifetime. If your equity LTCG in a financial year is ₹1.5 lakh, only ₹25,000 is taxable. If it’s ₹1 lakh, none of it is taxable. The exemption resets every April 1.

Equity STCG (Section 111A): 20% flat. No exemption. No basic-exemption-limit interaction. A ₹10,000 STCG gain is a ₹2,000 tax bill regardless of your other income.

Debt and hybrid-debt: at the investor’s marginal slab rate, regardless of holding period. Section 50AA. For someone at the 30% slab, every rupee of debt fund gain is taxed at 30% (effectively ~31.2% including 4% cess).

Gold (LTCG): 12.5% on gains, no indexation, no exemption. The ₹1.25L Section 112A exemption is equity-specific — it does not apply to gold.

Gold (STCG): at slab rate.

For our ₹10,000-a-month × 12% × 20-year equity SIP, the line-by-line tax bill is:

• LTCG gains (229 lots): ₹67,92,109
• LTCG exemption: ₹1,25,000
• LTCG taxable: ₹66,67,109
• LTCG tax at 12.5%: ₹8,33,389
• STCG gains (11 lots): ₹6,465
• STCG tax at 20%: ₹1,293
• Total tax: ₹8,34,682
• After-tax corpus: ₹83,63,892

The LTCG tax (₹8.33 lakh) is almost all of the bill. The STCG bite is rounding-error small because only 11 installments are STCG and they barely grew. But STCG dominates on shorter SIPs, where most lots are still inside the 12-month window.

Worked example: redeemed at month 13

Take the same ₹10,000-a-month equity SIP, redeemed after one year and one month. 13 installments total.

• Months 1–2 are LTCG lots (they’ve held ≥12 months by month 13)
• Months 3–13 are STCG lots
• LTCG gains: ₹2,506
• LTCG taxable: ₹0 (below ₹1.25L exemption)
• LTCG tax: ₹0
• STCG gains: ₹6,465
• STCG tax (20%): ₹1,293
• Net corpus: ₹1,37,678 (gross ₹1,38,971 minus tax ₹1,293)

The dominant cost here is STCG. Most of the gains haven’t qualified for LTCG yet, and they’re getting taxed at the higher 20% flat rate. This is why brackt’s calculator surfaces a warning when tenure is under 12 months — most of the realistic projection involves STCG-only taxation, which behaves very differently from the long-horizon LTCG-dominated case.

Worked example: redeemed at month 25

Same SIP, redeemed at month 25. 14 lots qualify for LTCG, 11 are still STCG.

• LTCG gains: ₹26,848
• LTCG taxable: ₹0 (still below the ₹1.25L exemption)
• LTCG tax: ₹0
• STCG gains: ₹6,465
• STCG tax: ₹1,293
• Net corpus: ₹2,82,020

Even at month 25 the LTCG bill is zero — total LTCG gains across all qualifying lots are still under the ₹1.25L exemption. The only meaningful tax is the STCG bite on the most recent 11 installments. This is one of the genuinely useful artifacts of the exemption: SIPs redeemed in their early years pay almost no equity tax, because the gains haven’t grown beyond the annual shield.

The exemption is what makes equity SIPs look so tax-efficient in the early years. It’s also what creates an optimisation opportunity for long-horizon investors that’s worth a short detour.

Why staggered redemption across financial years saves you tax

The ₹1.25L LTCG exemption is per financial year. Use it in one FY and you’ve used it. Use it in five FYs and you’ve shielded ₹6.25L of gains.

If you redeem ₹92 lakh of equity SIP corpus in one shot in March, you use the ₹1.25L exemption once and pay LTCG on the remaining ₹66.67L. If you redeem ₹18.4 lakh in March, ₹18.4 lakh in April (next FY), and three more equal slices over the following three years, you use the exemption five times — shielding ₹6.25 lakh of gains instead of ₹1.25 lakh, and cutting your LTCG bill by roughly ₹62,500.

This isn’t a tax loophole. It’s the rules working as designed. The exemption is annual; staggering uses each annual allowance.

There are two real frictions. First, splitting redemptions across FYs means living with market timing risk on the unredeemed portion — what’s worth ₹18.4 lakh in FY 26-27 might be worth more or less in FY 27-28. Second, if you actually need the full corpus in one go (downpayment, medical, education) the optimisation isn’t available to you. The strategy works best when redemption is for income drawdown rather than a lump-sum need.

brackt’s v1 calculator assumes single-FY redemption — it computes the worst-case tax bill on the assumption you take everything at once. The v1.5 calculator will model staggered redemption with FY-aware exemption stacking. Until then, the engaged reader can roughly halve the calculator’s LTCG figure for a 5-year staggered drawdown.

The new regime doesn’t change LTCG or STCG

A common confusion: “is mutual fund tax different under the new regime?”

No. Section 112A (equity LTCG), Section 111A (equity STCG), and Section 50AA (debt) all apply identically regardless of which regime — old or new — you’ve opted for. These are capital gains provisions, not income-tax slab provisions. The new regime under Section 115BAC changes the slab structure and disallows most Chapter VIA deductions, but it doesn’t touch the capital gains chapter.

What the new regime does change: it disallows the Section 80C deduction. That kills the tax benefit of ELSS. An ELSS SIP under the new regime is just a regular equity SIP with a 3-year per-installment lock-in — strictly worse than a flexible equity fund, because the lock-in buys you nothing. This is the subject of ELSS vs PPF vs the new regime.

It also disallows the Section 80E deduction for education loan interest — relevant if you’re considering taking a loan instead of liquidating equity for higher education. The education loan and 80E article covers that decision.

Practical implications

A few decisions this changes if you’re planning around an equity SIP:

The LTCG exemption is annual. Treat it as a “use it or lose it” allowance. If your equity gains in a year are likely to be under ₹1.25 lakh, consider whether you can shift redemptions across the FY boundary to use exemptions you’d otherwise waste.

STCG is much harsher than LTCG. The difference between selling an equity lot at month 11 and month 13 isn’t just 60 days — it’s the 20% STCG rate vs the 12.5% LTCG rate, plus access to the exemption. Hold for 12 months. Always.

Debt funds aren’t the tax-efficient alternative they used to be. Pre-2023, debt funds qualified for LTCG-with-indexation after 36 months, which often produced a near-zero effective tax rate. Section 50AA killed that for post-April-2023 purchases. A debt SIP today is taxed at slab regardless of duration. For someone at the 30% slab earning 7% on a debt fund and losing 6% to inflation, the after-tax real return is negative. brackt’s calculator surfaces this explicitly when you enable inflation + tax on a debt fund — sometimes the truth is unwelcome.

ELSS lock-in is per installment, not per SIP. This catches a lot of investors out. A SIP into an ELSS fund means month 1’s installment unlocks in month 37, month 2’s in month 38, and so on. The last installment of a 20-year ELSS SIP doesn’t unlock until month 276. brackt’s calculator assumes redemption at SIP end, which means the last 36 installments would theoretically still be locked — a real-world quirk that the calculator notes inline.

Gold FoF investors should know about the 24-month threshold. If you’ve been DCAing into a “gold mutual fund” through your AMC, check whether it’s an ETF (12-month LTCG) or a fund-of-funds (24-month LTCG). Most retail gold mutual funds are FoF structures.

So what

The calculator computes the tax. The article explains why it computes what it does, so you can read the breakdown and trust it.

Three structural takeaways:

1. Each SIP installment is a separate tax lot. FIFO at redemption. Holding period per lot decides LTCG vs STCG. Most articles flatten this; the engine doesn’t.

2. Equity LTCG has an annual ₹1.25L exemption. It’s per FY, not lifetime. Staggered redemption across FYs uses multiple exemptions and can meaningfully cut the tax bill on a large corpus. The v1 calculator assumes single-FY worst-case; the v1.5 calculator will model staggered.

3. Debt funds are slab-taxed regardless of holding period since April 2023 (Section 50AA). Net of inflation and slab tax, real returns on Indian debt funds for the 30%-slab investor are at best modest, often negative. The brackt calculator’s inflation + tax toggles surface this honestly.

Tax law will change. The exemption may rise or fall. The rates may shift. The mechanics — FIFO lots, per-installment holding period, per-FY exemption, fund-type-defined treatment — are how the system works underneath. They’ve been broadly stable for a decade, and they’re what the calculator builds against.

Frequently asked questions

Why are 11 lots STCG when the SIP redeems at month 240 — shouldn’t it be 12?

Because month 229’s installment grew for 240 − 229 + 1 = 12 months by redemption — which crosses the 12-month threshold and qualifies as LTCG. Only months 230 through 240 are STCG (11 lots). This is a minor brackt-engine detail but it’s the same boundary every AMC reporting tool applies.

Is the ₹1.25 lakh LTCG exemption per fund or in total?

In total, across all equity LTCG in a financial year. If you’ve used ₹80,000 of the exemption against gains in Fund A, only ₹45,000 remains for gains in Fund B. The exemption is per assessee, per FY.

Can I use the exemption against debt fund gains?

No. The ₹1.25L exemption under Section 112A is specifically for listed equity and equity-oriented mutual funds. Debt fund gains under Section 50AA don’t qualify, and gold (gold ETF or gold FoF) doesn’t either.

Does STT count against my LTCG tax?

Securities Transaction Tax is charged separately on equity transactions. It’s not credited against your LTCG bill. For mutual fund redemptions, the STT is small enough (a few basis points) that brackt’s calculator ignores it as immaterial — it would be the right call to model it in a tax-perfect engine, but it doesn’t move the headline number meaningfully.

What about TDS — does my AMC withhold tax on redemption?

For resident Indian investors, no — AMCs don’t withhold tax on mutual fund redemption gains. You’re expected to compute and pay the tax yourself at ITR time. This is unlike, say, FD interest, where the bank withholds. NRIs are a different case and have TDS deducted at source.

How do I report mutual fund gains in my ITR?

Equity LTCG goes under Schedule 112A. Equity STCG under Schedule 111A. Debt fund gains (Section 50AA) go under Schedule CG as short-term capital gains taxed at slab. Most online ITR platforms ingest the AMC’s annual statement and auto-populate the schedules. Verify the FIFO lot breakdown against your own records — auto-imports occasionally misclassify hybrid funds.

What if I redeem an ELSS installment before its 36-month lock?

You can’t. The lock is enforced at the AMC level — the system won’t let you place the redemption order. The only exception is on the investor’s death, where the legal heirs can redeem locked units. There’s no penalty mechanism — the lock-in just isn’t optional.