Is SIP Tax-Free? Navigating the Taxation Maze of Systematic Investment Plans

Delve into the taxation intricacies surrounding SIPs. This guide clarifies whether SIP investments enjoy tax-free status, shedding light on the taxation nuances that every investor needs to know.
Is SIP Tax-Free?
4 mins
14 Feb 2024

Investing in Systematic Investment Plans (SIPs) is a popular avenue for long-term wealth creation. While SIPs offer benefits like rupee-cost averaging and disciplined investing, understanding their tax implications is crucial. Let’s explore the applicable tax rules and exemptions on SIPs. By grasping the tax implications associated with SIPs, investors can make informed decisions and optimise their investment strategy for better financial outcomes.

What are SIPs?

Systematic Investment Plans (SIPs) are a popular investment choice offered by mutual fund companies. They enable investors to regularly invest a fixed amount in a mutual fund scheme, providing the advantage of rupee-cost averaging and helping mitigate market volatility.

How Does SIP Work?

SIPs allow investors to purchase a fixed number of mutual fund units at regular intervals. Understanding this process is crucial to comprehend how capital gains are calculated and taxed.

Is SIP Tax-free?

The tax treatment of SIPs depends on factors like the type of mutual fund scheme and the holding period. Capital gains from SIPs may be subject to taxes, and it's essential to understand the distinctions between short-term and long-term gains.

Taxation of Capital Gains from SIPs

Taxation of gains from SIPs varies based on the mutual fund type and investment duration. The period of holding in case of SIP shall be calculated from each instalment of the SIP. For instance, if an investment in an equity fund through SIP is redeemed after 13 months from the date of SIP registration, initial SIP units held for over a year are considered long-term. Long-term gains up to Rs. 1 lakh are tax-free. The balance units shall be considered as short term as the units were held for less than a year on the date of redemption. Short-term gains from SIPs redeemed within a year are taxed at a 15% flat rate, with additional cess and surcharge.

Another instance of SIPs invested in debt funds involves the tax implications associated with them. In this scenario, if an investor chooses to invest in debt mutual funds through SIPs, the tax treatment differs based on the holding period of the investment.

If the debt mutual fund units acquired through SIPs are held for less than three years, any gains realised upon redemption are treated as short-term capital gains. These gains are added to the investor's total income and taxed according to their applicable income tax slab rates. However, if the units acquired through SIPs are held for more than three years, the gains are classified as long-term capital gains. For debt funds, long-term capital gains are taxed at a flat rate of 20% with indexation benefits. Indexation allows investors to adjust the purchase price of their investment for inflation, reducing the taxable gains and thereby lowering the tax liability.

Tax Treatment of Income Distribution cum Capital Withdrawal (IDCW) from SIPs

Income Distribution cum Capital Withdrawal (IDCW) is part of the taxable income and is taxed according to the investor's applicable income tax slab rates.

Tax Planning Strategies with SIPs

Tax-saving strategies with SIPs involve several key approaches that investors can leverage to optimise their tax benefits and investment outcomes. One effective method is to consider SIPs classified under Equity-Linked Savings Schemes (ELSS), which offer tax exemptions under section 80C of the Indian Income Tax Act, 1961. These SIPs not only help investors save on taxes but also provide opportunities for long-term wealth creation. Additionally, SIPs offer flexibility in contributions, allowing investors to adjust their investment amounts periodically based on their financial situation and goals. This flexibility fosters financial discipline while potentially generating higher returns over the long term, all while facilitating efficient tax deductions. Moreover, early tax planning is crucial for maximising tax savings. By initiating SIP investments early in the fiscal year, investors can build a substantial corpus, leading to greater tax savings, wealth accumulation, and enhanced returns potential on their investments. Therefore, incorporating SIPs into one's investment strategy can be a prudent approach for achieving both tax-saving objectives and long-term financial goals.


Incorporating SIPs into financial strategies, especially in ELSS, can enhance returns and offer tax savings. With flexibility, potential for early tax planning, and a disciplined approach to wealth creation, SIPs play a crucial role in an investor's journey. Understanding the tax implications is paramount, and seeking professional advice ensures optimised investment decisions.

You can start an SIP with as low as Rs. 100 on the Bajaj Finserv Platform, invest now!