SIP Taxation Explained: What Happens When You Withdraw Your Money?

SIP Taxation Explained

If you’ve ever wondered,
“Okay, I’ve been investing regularly through SIPs… but what happens when I finally withdraw this money? Will I be taxed? How much? And how does it even work?”

Well, you’re not alone.

In fact, one of the most common doubts investors have is how SIP taxation works — especially at the time of withdrawal. Because while SIPs feel simple while investing (just automate and forget), the tax angle can be a bit confusing.

Let’s break it all down for you — like a friend would — with simple explanations, real numbers, and zero jargon.

First, When Do You Pay Tax in SIPs?

Let’s get one thing straight — you don’t pay any tax while investing in SIPs.

Tax is applicable only when you withdraw your money — whether partially or fully.

So the question is: When you withdraw, what part of your money is taxed?

Answer: Only the gains, not the amount you invested.

Your original investment (called the “principal”) is never taxed. Only the profits you make — the difference between what you invested and what you got back — are taxable.

Quick Basics Before We Dive Deeper

In most cases, people invest in Equity Mutual Funds via SIPs. So this explanation assumes your SIP is also in an equity mutual fund (like large-cap, flexi-cap, mid-cap etc.).

Now, equity mutual funds have two types of capital gains taxation:

Holding Period	Type of Gain	Tax Rate
Less than 1 year	Short Term Capital Gain (STCG)	20%
More than 1 year	Long Term Capital Gain (LTCG)	12.5% (above ₹1.25 lakh)

Let’s Look at a Real SIP Example

Imagine this:

You started a SIP of ₹10,000 per month in A fund
You continued this SIP for 5 years
So you invested a total of ₹6,00,000 over time
At the end of 5 years, your investment grew to ₹9,00,000

So your profit (or “capital gain”) = ₹9,00,000 – ₹6,00,000 = ₹3,00,000

Now you want to withdraw this money

What kind of tax would you pay?

That depends on how you withdraw it. Let’s break it into two real-world cases

Case 1: Full Withdrawal

You decide to withdraw the entire ₹9,00,000 at once

Here’s what happens:

• Since the SIP ran for 5 years, most of the units are older than 1 year
  
• So, your capital gain is considered Long Term Capital Gain (LTCG)
  
• LTCG is tax-free up to ₹1.25 lakh per year
  
• Anything above that is taxed at 12.5 %

So here’s your calculation:

• Total gain: ₹3,00,000
  
• Tax-free: ₹1,25,000
  
• Taxable: ₹1,75,000
  
• Tax: ₹21,875
  

Result: You pay ₹21,875 in tax, and you still get to enjoy ₹1.53 lakhs in profit

Case 2: Partial Withdrawal (Say ₹3,00,000)

Let’s say instead of withdrawing everything, you just take out ₹3,00,000 — maybe to upgrade your phone, take a trip, or fund your child’s tuition

Now, the tax works differently here because not all units are withdrawn

In SIPs, taxation follows a concept called FIFO — “First In, First Out”

This means that when you withdraw money, the oldest mutual fund units are considered to be sold first

So if those units are older than 1 year, they attract LTCG tax (12.5 % above ₹1.25 lakh gain)

If they’re newer or less than 1 year, they attract STCG tax (20 %)

Here’s a simple breakdown:

Let’s say in the ₹3,00,000 you withdrew:

• ₹2,00,000 was your original principal
  
• ₹1,00,000 was your gain
  

Now, because the gain is only ₹1,00,000, and LTCG is tax-free up to ₹1.25 Lakh, you pay no tax

But remember,  if you had withdrawn from more recent units (less than 1 year old), that gain would be taxed at 20 % as STCG

So, Is There Any Tax Benefit in SIPs?

Short answer: No special tax benefit — unless you’re investing in an ELSS (Equity Linked Saving Scheme) fund

SIP doesn’t reduce your tax. But it does help you manage it better

Because your investments happen monthly, your mutual fund units mature at different times, and with some planning, you can time your withdrawals to minimise or even avoid tax

That’s the hidden benefit of Systematic Investment Plans

So, How Much Tax Will You Pay on Your SIP?

Here’s the truth: it depends

On:

• When your SIP started
  
• How long each unit has been held
  
• How much you withdrawing
  
• Whether your gain crosses ₹1.25 lakh a year
  

It’s not always easy to calculate on your own

But the good news?
We can do it for you

Just drop your name and SIP details in the comments (or message us privately), and we’ll tell you exactly what kind of tax you’d need to pay — no guesswork, no surprises

What to Remember

Action	Tax Type	Tax Rate	Tip
Full withdrawal after 1 year	LTCG	12.5 over ₹1.25 lakh	Spread withdrawals over the years to save tax
Partial withdrawal	Depends on the unit age	12.5 % (LTCG) or 20% (STCG)	Use FIFO smartly
SIP in ELSS fund	Eligible for 80C tax deduction	Lock-in 3 years	Best for tax-saving

Final Word

Systematic Investment Plans is a brilliant investment habit, but it’s even better when you understand how tax plays a role

With a little planning and awareness, you can grow your money and save tax, too

And if all this still sounds complicated, don’t worry. That’s what we’re here for

At BFC Capital, we’re always happy to help you figure out the smartest, most tax-efficient way to manage your SIPsLet your money work — and let us take care of the tax part!

Please share your thoughts on this post by leaving a reply in the comments section. Contact us via phone, WhatsApp, or email to learn more about mutual funds, or visit our website. Alternatively, you can download the Prodigy Pro app to start investing today!

Disclaimer: This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.