SIP Returns After LTCG Tax: The Real Math

How LTCG Tax Works on SIP: The Installment Problem

Unlike a lumpsum investment where you buy once and sell once, SIP has hundreds of purchase dates. Each instalment has its own:

• Purchase date — the day your SIP was processed
• Purchase price — the NAV on that day
• Holding period — starts from that instalment's date, not the first SIP date

Example: You start a ₹10K SIP on Jan 1, 2026. On July 1, 2027, you redeem ₹50K worth of units:

• The 12 instalments from Jan-Dec 2026 (>12 months old) → LTCG at 12.5%
• The 6 instalments from Jan-Jun 2027 (≤12 months old) → STCG at 20%

This is why holding >12 months before touching your SIP matters: older units get the lower LTCG rate.

The Effective CAGR Impact

A 12% pre-tax CAGR becomes roughly 11.2-11.4% after LTCG tax. Here is the math for ₹10K/month SIP over 20 years:

• Pre-tax CAGR: 12% (corpus: ₹99.9L)
• Total gains: ₹75.9L
• LTCG tax: (₹75.9L - ₹1.25L) × 12.5% + 4% cess = ≈₹9.33L
• Post-tax corpus: ₹90.6L
• Post-tax CAGR: ≈11.3%

The CAGR drop of 0.7% is small compared to FD, where the effective post-tax return drops from 7% to 4.9% (30% bracket) — a reduction of 2.1%. SIP's tax drag is 3x smaller than FD's in percentage terms.

How STCG Tax Can Hurt

The real enemy is not LTCG at 12.5%, but STCG at 20%. If you redeem SIP units within 12 months:

• Gains are taxed at 20% + surcharge + 4% cess
• No ₹1.25L exemption — every rupee of short-term gain is taxable
• Effective rate: ≈23% for top bracket (including surcharge + cess)

Avoid redeeming SIP units bought within the last 12 months. If you need money, redeem older units first, or wait until they cross the 12-month mark. This simple habit saves you 7.5% in tax.

Tax Comparison: SIP vs Other Instruments

Here is what ₹10L invested grows to after 15 years in different instruments (assuming 30% tax bracket where applicable):

• Equity SIP (12% pre-tax, LTCG 12.5%): ₹54.8L → ₹53.5L post-tax. Effective return: 11.4%
• FD (7% pre-tax, slab rate 30%): ₹29.8L → ₹22.5L post-tax. Effective return: 5.4%
• PPF (7.1%, EEE tax-free): ₹29.8L → ₹29.8L. Effective return: 7.1%
• Specified debt fund (8% pre-tax, taxed at slab rate): ₹37.6L → ≈₹34L post-tax. Effective return: ≈6.5%

SIP's post-tax returns beat every other option for long-term wealth creation. Use the SIP calculator to model your specific scenario with tax settings.

Summary: Key LTCG Rules for SIP

• Rate: 12.5% on LTCG (>12 months) + 4% cess
• Exemption: ₹1.25L/year tax-free — resets every April 1
• STCG: 20% on gains from units held ≤12 months — no exemption
• FIFO applies: oldest units sold first, giving maximum LTCG benefit
• No indexation: for equity funds. Simple cost-minus-sale calculation
• Form 112A: report LTCG in your ITR under this section
• Tax harvesting: sell losing funds to offset gains — completely legal