Is SIP tax free? – A detailed guide

SIP taxation
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A Systematic Investment Plan (SIP) is a popular investment method that allows you to invest a fixed amount regularly, say monthly or quarterly, in a mutual fund scheme. SIPs are known for their discipline, simplicity, and the power of compounding they offer. SIPs enable investors to buy units of a mutual fund at different levels of market prices, providing the benefit of rupee-cost averaging.
Let’s take a closer look at the features of SIPs to understand the tax implications of this investment style.

  • Table of contents
  1. Key features of SIPs
  2. Taxation of SIPs
  3. SIPs – taxation on capital gains
  4. SIPs - taxation on Income Distribution cum Capital Withdrawal
  5. How to do tax efficient SIP investment?
  6. FAQ

Key features of SIPs

  • Regular investment: SIP allows you to invest a predetermined amount at regular intervals, making it one of the most disciplined investment styles.
  • Rupee-cost averaging: This feature reduces the average cost of units over time, as you purchase more units when prices are low and fewer when prices are high.
  • Compounding benefit: Regular investments over a long period can grow significantly due to the compounding effect.
  • Flexible and convenient: SIPs are flexible; you can start, stop, or modify the amount anytime.

Taxation of SIPs

A common question among investors is, “Is SIP tax-free?” The answer is not straightforward. The taxation of SIPs depends on the type of mutual fund you invest in and the duration of your investment.

Here’s a breakdown of how it works for different types of funds:

SIPs – taxation on capital gains

  • Equity-oriented funds: If the SIP is in an equity fund, the gains are subject to capital gains tax. Short-term capital gains (STCG), for investments held for less than a year, are taxed at 15%. Long-term capital gains (LTCG) over Rs. 1 lakh are taxed at 10% without indexation benefit.
  • Debt funds: Capital gains from SIP investments in debt funds made after April 1, 2023 are classified as STCG for taxation purposes irrespective of the holding period. They are taxed at the investor’s applicable income tax slab. However, SIP investments in debt funds made before April 1, 2023 and held for over 3 years are deemed as LTCG. They are taxed at 20% with indexation benefit.
  • Tax-saving SIPs (ELSS): Investments in Equity Linked Savings Schemes (ELSS) via SIP qualify for a deduction under Section 80C of the Income Tax Act, 1961 up to Rs. 1.5 lakh per annum. However, the LTCG tax still applies.

SIPs – taxation on Income Distribution cum Capital Withdrawal

IDCW from units accumulated through SIPs are taxable in the hands of the unit holders. The proceeds received is clubbed with the total income of the investor and is taxed as per their income tax slab rates. Additionally, for resident investors, the mutual fund company is required to deduct a 10% TDS if the income from units of mutual fund exceeds INR 5,000 in a financial year. For non-resident investors, the TDS deducted is 20% plus applicable surcharge plus 4% cess.

How to do tax-efficient SIP investment?

To make your SIP investments tax-efficient, consider the following:

  • Choose a suitable fund: Depending on your tax slab and investment horizon, choose between equity and debt funds wisely.
  • Invest in ELSS: For tax-saving purposes, consider SIPs in ELSS funds. They offer the dual benefit of tax saving and potential for reasonable returns.
  • Hold investments for the long term: To benefit from lower LTCG tax, hold your equity fund SIP investments for more than a year.
  • Tax harvesting: This involves redeeming and reinvesting capital gains strategically to utilise the Rs. 1 lakh exemption limit for LTCG in equity funds.


SIPs are not entirely tax-free, but with careful planning and strategising, investors can make their SIP investments more tax-efficient. Understanding the nature of the fund, the applicable taxes, and using strategies like tax harvesting can significantly enhance the after-tax return on your SIP investments.


How to invest in SIP for tax-free returns?
While SIPs are not entirely tax-free, investing in ELSS via SIP can provide tax benefits under Section 80C. However, LTCG tax still applies.

Are there any tax-free SIP options?
No SIP offers completely tax-free returns. The tax liability depends on the type of fund and the duration of the investment.

Can I claim tax benefits on all SIP investments?
Tax benefits can be claimed only on investments in ELSS SIPs under Section 80C of the Income Tax Act, 1961.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as an endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purposes only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals, and horizon. This information is subject to change without any prior notice.