Day 364 vs day 366: the two day tax cliff

A friend texted me Monday morning. He wanted to redeem an equity mutual fund the next day. 360 days since the original cheque had cleared. He needed the money for an upcoming spend. Could he just hit sell.

I asked him one question. Lump sum or SIP. Lump sum, he said.

I told him to wait six days. Here is what those six days are worth.

Same Rs 10 lakh in. Same Rs 12 lakh paper value today. Two calendar days apart on the sell side.

On day 364, three things are still alive on his ticket. The exit load schedule (most equity MFs charge 1 pct if redeemed inside a year, so Rs 12,000 on a Rs 12L NAV). The STCG bracket at 20 pct on the post-load gain of Rs 1.88L, which is Rs 37,600. And no LTCG exemption, because the unit clock has not crossed 365 days. Net cheque to him . Rs 11.50 lakh.

On day 366, all three move. Exit load is zero. The 20 pct STCG bracket falls to the 12.5 pct LTCG bracket. The Rs 1.25 lakh per financial year LTCG exemption opens up, so only Rs 75,000 of the Rs 2 lakh gain gets taxed at 12.5 pct, which is Rs 9,375. Net cheque . Rs 11.90 lakh.

Rs 40,225 of net return. Four percentage points on a Rs 10 lakh corpus. Same fund. Same market. Same units. 48 hours.

And this is the easy case. SIP redemptions are worse. The AMC releases units FIFO, so 13 monthly instalments do not mean 13 months of long-term holding. Only month one is past the cliff.

Three rules I gave him. Mark the buy date on every fresh purchase and set a calendar nudge for day 367. Treat SIPs as 12 separate clocks, not one. Plan the sell around the cliff, not around the EMI calendar.

The market does not know the difference between a 365 day hold and a 367 day hold. The taxman does.

The rule behind the cliff, as of 2026

For listed equity shares and equity oriented mutual fund units, a gain is long term if the units were held for more than 12 months. That rule has applied to all listed securities since 23 Jul 2024. Short term gains on these assets are taxed at a flat 20 percent, long term gains at 12.5 percent on the part above Rs 1.25 lakh in a financial year. From 1 Apr 2026 the same rates sit in the Income-tax Act 2025 (sections 196 and 198 replace the old 111A and 112A), and the Finance Bill 2026 left them unchanged.

Two details matter at the edge. "More than 12 months" means you count from the purchase date, so a unit bought on 5 Jun 2025 turns long term on a sale from 6 Jun 2026. And the exit load is a fund rule, written in each scheme's documents, not a tax rule. Many equity funds charge 1 percent within a year, but the period and the rate vary.

The two tickets, side by side

With the 4 percent health and education cess added, the short term tax is Rs 39,104 and the long term tax Rs 9,750, so the gap widens slightly, to about Rs 41,354. One more thing the cess does not change: the Rs 60,000 rebate that makes income up to Rs 12 lakh tax free in the new regime cannot be used against these special rate gains. A modest earner pays the 20 percent too.

Your own redemption, before you click

Set the exemption to zero if you have already booked Rs 1.25 lakh of long term equity gains this year. The exemption is one pool for all listed equity and equity fund gains, not one per fund.

A SIP is twelve clocks, not one

Units leave a folio first in, first out. Each SIP instalment is its own purchase with its own date, so the oldest units become long term first and the newest are always short term.

1. 5 Jun 2025First instalment

   Long term on a sale from 6 Jun 2026.

2. 5 Dec 2025Seventh instalment

   Long term on a sale from 6 Dec 2026.

3. 5 Jun 2026Thirteenth instalment

   Short term until 6 Jun 2027.

4. 10 Jun 2026Redeem everything

   Only the first instalment's units are long term. The other twelve are taxed at 20 percent.

A Rs 10,000 SIP running for 13 months and redeemed in full on 10 Jun 2026 is about 92 percent short term by money. If only part of the folio is needed, redeeming that part first removes the oldest units, which are the long term ones. That is the order the rule already uses.

The free Learn module on equity taxation after July 2024 has the full rule set, worked examples and the new section numbers. The post on the Rs 1.25 lakh you forget every April shows how to use the exemption every year rather than once.