Redeeming Mutual Funds? FIFO Can Change Your Tax
When you sell mutual fund units, the tax you pay depends on WHICH units get sold first. The FIFO method — First In, First Out — means your oldest units are sold before newer ones. This affects whether your gains are taxed as short-term or long-term capital gains, and knowing this can save you real money at redemption time.
If you invested ₹5,000/month via SIP for 3 years and redeem just 10 units today, FIFO means units from your FIRST SIP installment — bought 36 months ago — get sold first, not last month's units. That single rule could be the difference between paying 15% tax or zero long-term capital gains tax on those units.
On a ₹1 lakh gain from equity mutual funds, choosing the right redemption timing under FIFO can shift your tax from ₹20,000 (STCG at 20%) to as little as ₹0 if gains fall within the ₹1.25 lakh LTCG exemption — saving your wallet significantly.
Key Takeaways
Before redeeming, check the purchase date of your oldest units using your fund house's statement or CAMS/KFintech portal — if they're over 12 months old (for equity funds), you pay 10% LTCG tax instead of 20% STCG, saving you significantly on large redemptions.
If you need cash urgently but your newest SIP units are less than 12 months old, consider redeeming only the amount covered by older units so those gains qualify as long-term — even partial redemption planning under FIFO can reduce your tax outgo.
Keep a redemption log: every time you withdraw, note how many units were sold and their original purchase dates — this helps you accurately report capital gains in your ITR and avoid notices from the income tax department for mismatched figures.
If you invest in mutual funds through SIPs, you probably have units bought at different times and different prices. When you hit the redeem button, a key question arises: which units actually get sold? The answer is determined by the FIFO method — First In, First Out — and it directly decides how much capital gains tax you owe.
Under FIFO, the units you bought earliest are treated as the ones you sell first. For equity mutual funds, the holding period matters enormously for tax: units held for more than 12 months attract Long-Term Capital Gains (LTCG) tax at 10% (with the first ₹1.25 lakh of gains tax-free per year). Units held for 12 months or less attract Short-Term Capital Gains (STCG) tax at 20%. So if your oldest units have crossed the one-year mark, FIFO actually works in your favour — those units get redeemed first and qualify for the lower LTCG rate.
Here's a practical example: say you've been doing a ₹10,000 SIP monthly for 18 months. If you redeem ₹50,000 worth of units today, FIFO ensures the units from months 1 through roughly 5 or 6 get sold first — all of which are over 12 months old. Those gains attract LTCG, not STCG. The difference in tax rate (10% vs 20%) on even a ₹50,000 gain is ₹5,000 in your pocket.
You can download your full account statement from CAMS, KFintech, or directly from your fund house to see unit-wise purchase dates and NAVs. Apps like GoCredit can also help you track your overall financial picture so your investments align with your tax planning goals.
**Pro Tip:** Never redeem in bulk without checking your oldest unit dates first. If some older units are just days away from crossing the 12-month mark, wait it out — a few days' patience can legally shift your entire redemption into the lower LTCG tax bracket and save you thousands.
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