This blog post is based on insights from Rahul Jain’s YouTube video: “SIP Tax Calculation: How to Pay 0% Tax on ₹9 Lakh Withdrawal | FIFO Method Explained”
Have you ever wondered how much tax you’ll actually pay when you withdraw money from your mutual fund SIPs?
Here’s a startling truth: 80% of Indian investors have no clue how SIP taxation works. Of the remaining 20%, most believe they simply pay 12.5% Long-Term Capital Gains (LTCG) tax on their profits.
Wrong answer.
What if I told you that with smart timing and understanding of the FIFO (First In, First Out) method, you could withdraw ₹9 lakhs from your SIP portfolio and pay absolutely zero tax—legally?
This isn’t magic. It’s financial literacy that your CA might not explain, but understanding it could save you tens of thousands of rupees. Let’s break down exactly how SIP taxation works and how you can optimize your withdrawals like a pro.
What Really Happens When You Invest in SIPs?
Before diving into taxes, you need to understand how mutual funds actually work behind the scenes.
The Unit Allocation System
When you invest ₹1 lakh in a mutual fund, you don’t just “put money in.” Instead, you buy units of that fund at a specific price called the NAV (Net Asset Value).
For example:
- You invest ₹3,00,000 when NAV is ₹105.54
- Units allocated: ₹3,00,000 ÷ ₹105.54 = 2,842.261 units
“Sara kaam mutual funds mein unit ke hisaab se hota hai.” (Everything in mutual funds works on the basis of units.) — Rahul Jain
Key insight: NAV changes daily based on market movements. When markets rise, NAV goes up; when markets fall, NAV drops. This daily fluctuation is why your SIP statement shows different units allocated each month—even when you invest the same amount.
Why This Matters for Taxation
Here’s where it gets interesting. If you run a weekly SIP of ₹50,000, look at how your unit allocation varies:
| Date | Investment | NAV | Units Allocated |
| Week 1 | ₹50,000 | ₹44.69 | 1,118 units |
| Week 2 | ₹50,000 | ₹47.00 | 1,061 units |
| Week 3 | ₹50,000 | ₹46.50 | 1,075 units |
Same investment amount, different units each time. This transaction history becomes the foundation of your tax calculation.
The FIFO Method: The Rule That Changes Everything
When you withdraw money from your SIP portfolio, the tax authorities don’t look at your investment as one lump sum. Instead, they use the FIFO (First In, First Out) method.
What FIFO Means for You
FIFO rule: The units purchased earliest are considered sold first.
Think of it like a queue at a movie theater—the person who arrived first gets in first. Similarly, your oldest SIP installments exit first when you redeem.
Critical implication: You cannot choose which units to sell. The system automatically picks your oldest investments first, which directly impacts whether you pay Short-Term Capital Gains (STCG) at 20% or Long-Term Capital Gains (LTCG) at 12.5%.
Real-World Case Study: Shah Rukh Khan’s ₹25 Lakh SIP
Let me walk you through a detailed example using an Excel calculation. This will show you exactly how taxes are computed.
The Setup
Investor: Shah Rukh Khan
Strategy: ₹1 lakh monthly SIP starting January 1, 2024
Fund Type: Equity Mutual Fund (Flexi Cap)
Total Investment: ₹25 lakhs over 25 months
Average NAV: ₹116
Total Units Accumulated: 21,512 units
Current NAV (Jan 15, 2026): ₹140
Portfolio Value: ₹30,11,680 (₹30.12 lakhs)
Total Profit: ~₹5 lakhs (20% returns)
Scenario 1: Withdrawing ₹25 Lakhs (The Tax Trap)
Shah Rukh needs ₹25 lakhs for a home down payment. Here’s how the withdrawal works:
Step 1: Calculate units to redeem
- ₹25,00,000 ÷ ₹140 (current NAV) = 17,857 units need to be sold
- Step 2: Apply FIFO method
- The system starts selling from his very first SIP (Jan 1, 2024) and moves forward
- First 21 SIP installments (21 months) are fully redeemed = 17,779 units
- From the 22nd installment (Sept 1, 2025), only 78 units are redeemed (partial)
Step 3: Calculate holding period for each batch
| SIP Date | Units Sold | Purchase NAV | Profit/Unit | Holding Days | Tax Type |
| Jan 1, 2024 | 1,000 | ₹100 | ₹40 | 745 | LTCG (12.5%) |
| Feb 1, 2024 | 980 | ₹102 | ₹38 | 714 | LTCG (12.5%) |
| … | … | … | … | … | … |
| Aug 1, 2025 | 847 | ₹118 | ₹22 | 167 | STCG (20%) |
| Sept 1, 2025 | 78 | ₹120 | ₹20 | 136 | STCG (20%) |
The Tax Calculation:
LTCG Portion (held > 365 days):
- Total LTCG Profit: ₹3,96,564
- Exemption: ₹1,25,000 (tax-free)
- Taxable LTCG: ₹2,71,564
- Tax @ 12.5%: ₹33,946
STCG Portion (held < 365 days):
- Total STCG Profit: ₹93,250
- Tax @ 20%: ₹18,650 (no exemption)
Total Tax Paid: ₹52,596
“Agar aap ₹25 lakh withdraw karte ho apne ₹30 lakh ke portfolio se, toh ₹52,596 ka fatka lag gaya.” (If you withdraw ₹25 lakhs from your ₹30 lakh portfolio, you get hit with ₹52,596 in taxes.) — Rahul Jain
The Smart Strategy: How Akshay Kumar Paid Zero Tax
Now let’s see how intelligent timing changes everything.
Scenario 2: Withdrawing ₹9 Lakhs (Same Amount, Different Approach)
Shah Rukh’s Approach (Single Withdrawal):
- Withdraws ₹9 lakhs on January 15, 2026
- LTCG Profit: ₹2,27,610
- Tax after ₹1.25L exemption: ₹12,845
Akshay’s Approach (Split Across Financial Years):
- January 15, 2026 (FY 2025-26): Withdraw ₹4.5 lakhs
- April 15, 2026 (FY 2026-27): Withdraw ₹4.5 lakhs
The Magic of Splitting:
FY 2025-26 Withdrawal (₹4.5 lakhs):
- Units redeemed: 3,214
- LTCG Profit: ₹1,21,000
- Tax: ₹0 (within ₹1.25L exemption limit)
FY 2026-27 Withdrawal (₹4.5 lakhs):
- Units redeemed: 3,214 (next batch in FIFO)
- LTCG Profit: ₹1,26,000
- Exemption: ₹1,25,000
- Taxable: ₹1,000
- Tax @ 12.5%: ₹125 (effectively zero)
Total Tax Saved: ₹12,720
“Akshay Kumar ji ne just because 31st March se pehle ek baar nikaal liya paisa aur 31st March ke baad nikaal liya… ₹1.25 lakh ki jo chhoot hai woh do baar mil gayi unko.” (Akshay Kumar withdrew once before March 31 and once after… so he got the ₹1.25 lakh exemption twice.) — Rahul Jain
Understanding STCG vs. LTCG: The Holding Period Game
The Classification Rules
| Holding Period | Fund Type | Tax Category | Tax Rate |
| < 365 days | Equity Mutual Funds | STCG | 20% |
| > 365 days | Equity Mutual Funds | LTCG | 12.5%* |
*LTCG is tax-free up to ₹1,25,000 per financial year.
Why This Matters
Short-Term Capital Gains (STCG) are painful because:
- No exemption limit (unlike LTCG’s ₹1.25L relief)
- Higher rate: 20% flat
- Immediate impact: Every rupee of profit is taxed
Long-Term Capital Gains (LTCG) are friendlier because:
- ₹1.25 lakh annual exemption (use it or lose it)
- Lower rate:5% beyond exemption
- Indexation benefit: Not available for equity funds, but the exemption makes up for it
The Strategic Withdrawal Framework: Your Action Plan
Step 1: Map Your SIP History
Before withdrawing, create a spreadsheet with:
- Every SIP date and amount
- NAV at each investment
- Units allocated
- Current holding period (days)
Step 2: Identify the FIFO Chain
Determine which units will be sold first based on your withdrawal amount. Remember:
- First SIPs = First Out
- Calculate how many installments get fully redeemed
- Check if the last installment is partial
Step 3: Time Your Withdrawals Across Financial Years
The Golden Rule: If your LTCG profit exceeds ₹1.25 lakhs, split withdrawals across March 31 and April 1.
Example Strategy:
- March 25, 2026: Withdraw amount generating ₹1.25L LTCG (tax-free)
- April 5, 2026: Withdraw remaining amount (new financial year = fresh ₹1.25L exemption)
Step 4: Avoid STCG When Possible
If your recent SIPs (last 12 months) show profits:
- Wait until they complete 365 days
- Or withdraw only up to the point where older units cover your needs
“Government 2024 mein LTCG ko 10% se 12.5% bada diya… Government toh tax badhayegi, badhane do. Hamara kaam hai ki hum thode smartly, legally apne tax ko optimize karein.” (The government increased LTCG from 10% to 12.5% in 2024… Let them increase taxes. Our job is to optimize our taxes smartly and legally.) — Rahul Jain
Common Mistakes That Cost You Money
Mistake #1: The “My CA Will Handle It” Approach
Most CAs calculate taxes after you’ve withdrawn. By then, it’s too late to optimize. Calculate before you redeem.
Mistake #2: Ignoring the FIFO Rule
You cannot choose which units to sell. Don’t assume you can “sell recent units first” to avoid taxes. The system doesn’t work that way.
Mistake #3: Missing the Financial Year Window
The ₹1.25 lakh LTCG exemption is per financial year (April 1 – March 31). If you don’t use it, you lose it. You cannot carry forward unused exemptions.
Mistake #4: Not Checking NAV History
If you started SIPs when markets were high and are withdrawing when markets are low, you might actually have capital losses on early installments. These can offset gains—but only if you calculate properly.
Frequently Asked Questions (FAQ)
Q.1. How is tax calculated on SIP redemptions?
Tax is calculated using the FIFO (First In, First Out) method. Each SIP installment is treated as a separate investment. When you redeem, the earliest purchased units are considered sold first. The holding period of these specific units determines whether you pay STCG (20%, < 1 year) or LTCG (12.5%, > 1 year).
Q.2. What is the ₹1.25 lakh LTCG exemption?
For equity mutual funds, Long-Term Capital Gains up to ₹1,25,000 per financial year are completely tax-free. This is a blanket exemption—no conditions attached. Gains beyond this limit attract 12.5% tax. Crucially, this exemption resets every April 1.
Q.3. Can I choose which SIP units to sell for tax benefit?
No. Tax laws mandate the FIFO method. You cannot selectively sell newer or specific units to optimize taxes. The system automatically considers your oldest units as sold first. The only control you have is timing your withdrawals across financial years.
Q.4. Is it better to withdraw SIP investments before or after 1 year?
Always after 1 year if possible. STCG (Short-Term Capital Gains) on equity funds attract 20% tax with zero exemption. LTCG attracts only 12.5% and gives you ₹1.25 lakhs tax-free buffer. If you need money urgently, try to withdraw only up to the amount covered by units older than 1 year.
Q.5. How do I calculate my exact tax liability before withdrawing?
Request a Capital Gains Statement from your mutual fund house or use their online calculator. Alternatively, create an Excel sheet tracking:
- SIP dates and NAVs
- Current NAV
- Apply FIFO to determine which units will be sold
- Calculate holding period for each batch
- Apply LTCG exemption and tax rates accordingly
Conclusion: Knowledge is Your Best Investment
SIPs remain one of the most powerful wealth-building tools for long-term investors. But building wealth is only half the battle—preserving it through smart tax planning is equally crucial.
The FIFO method isn’t just an accounting rule; it’s a strategic tool. By understanding that each SIP installment has its own “birth date” and cost, you can time your withdrawals to maximize the ₹1.25 lakh annual LTCG exemption and minimize STCG hits.
Key takeaways:
- Every SIP is a separate investment with its own purchase date and NAV
- FIFO means oldest units sell first—plan accordingly
- Split large withdrawals across financial years to double your LTCG exemption
- Always calculate before you redeem, not after
- That “extra” 2-3 months of waiting can save you thousands in taxes
Remember: The government will keep changing tax rates (LTCG went from 10% to 12.5% in 2024). What stays constant is your ability to optimize within the rules.
What’s your biggest takeaway from this SIP taxation guide? Have you ever been surprised by a tax bill on your mutual fund withdrawals? Share your experience in the comments below!
Source & Credit
This blog post is based on insights from Rahul Jain’s YouTube video: “SIP Tax Calculation: How to Pay 0% Tax on ₹9 Lakh Withdrawal | FIFO Method Explained”
The original content has been translated, expanded, and repurposed for educational purposes.
About the Creator: Rahul Jain is a SEBI Registered Research Analyst who creates independent research content in simple Hindi to help Indian investors make informed financial decisions.
