How SIPs and Mutual Funds Are Taxed in India (FY 2025-26)

How a mutual fund is taxed depends on what it actually holds, not what its name suggests — and if you invest via SIP, each instalment is taxed on its own timeline. Here’s how it really works.

Equity-oriented funds — at least 65% in equity

A fund investing 65% or more of its assets in equity shares of Indian companies is classified as equity-oriented for tax purposes:

• Long-term (held over 12 months): 12.5% on gains above the ₹1.25 lakh annual exemption
• Short-term (held 12 months or less): 20%

Debt and other funds — under 65% equity

Debt funds, and any fund that doesn’t cross the 65% equity threshold, acquired on or after 1 April 2023 get no long-term benefit at all under Section 50AA — gains are added to your income and taxed at your slab rate, regardless of how long you held the units.

Hybrid funds sit in between

A “balanced” or “hybrid” fund isn’t automatically taxed one way — check its actual equity allocation. Cross 65% equity and it gets equity tax treatment; stay below it and it’s taxed like a debt fund. The fund’s factsheet, not its name, decides this.

How SIP taxation actually works

Each SIP instalment is treated as an independent purchase with its own holding period, on a first-in-first-out basis — not the date of your very first instalment.

Don’t forget dividends (IDCW)

If you’ve chosen the IDCW (dividend) option instead of growth, payouts are added to your income and taxed at your slab rate, with TDS deducted if the amount crosses the prescribed threshold in a year.

Model your SIP’s maturity value in our SIP Calculator, and have a CA plan redemptions around instalment-wise holding periods to legally minimise the tax you pay on the way out.