LTCG on Mutual Fund SIP

No, your working is wrong.

In case of Mutual Fund SIP, you get units every month based on NAV.

So if in 5 years you invest 6 Lakhs, you need to also see total no. of units that you have accumulated. Say in 5 years you have accumulated 6000 units i.e. it makes Rs. 100 per unit.

Now in 7th year, when your MF value is 12 Lakhs, total no. of units remains same as you are not investing after end of 5 years. So technically, your value of 12 Lakhs is for 6000 units only i.e. it makes Rs. 200 per unit.

Now when you redeem only Rs. 7 Lakhs, so you are technically redeeming only 3500 units (6000 * 7L / 12L)

So your cost of acquisition for 3500 units shall be only Rs. 3.5L (3500 units * Rs. 100 per unit)  

So basically your LTCG shall be Rs. 3.5 Lakhs ( 7 L redeem value - 3.5 L cost of acquisition) and accordingly you will be liable for taxation.

Please note that above example is just to make your logic clear, I haven't considered indexation and FIFO method to derive cost of acquisition. I hope it cleares your query though.