When you redeem mutual fund units for more than you paid for them, the profit is known as a capital gain and may be taxable. Whether it is treated as a short-term or long-term capital gain depends on factors such as the type of mutual fund, when the units were purchased and how long they were held.
This classification affects how the gain is taxed. This article explains when short-term capital gains tax applies to mutual funds, how it is calculated and the tax rates investors need to know.
Table of Contents
What are short-term capital gains (STCG)?
A short-term capital gain is the profit you earn when you sell or redeem a mutual fund investment within the period classified as short term. This holding period depends on the type of mutual fund.
The gain is determined by subtracting the purchase cost and eligible transfer expenses from the sale or redemption value. The tax rate depends on the fund category and holding period.
Key Takeaways
- Short-term capital gains tax depends on the type of asset, its holding period and the applicable tax provisions.
- Equity-oriented mutual fund STCG is generally taxed at 20%, subject to applicable conditions, surcharge and health and education cess.
- Specified mutual funds acquired on or after 1 April 2023 are treated as short-term capital assets irrespective of the holding period.
- Eligible capital losses may be set off against capital gains subject to applicable tax rules and conditions.
- Investors may consider tax implications alongside their financial goals, risk appetite, investment horizon and overall asset allocation.
Key differences: STCG vs. LTCG
Short-term capital gains (STCG) and long-term capital gains (LTCG) primarily differ in terms of the holding period used to classify an investment and the tax treatment applicable to the resulting gains. The differences are summarised in the table below:
| Basis | STCG | LTCG |
| Holding Period | Applies when units are held for a shorter period as specified under tax rules. | Applies when units are held for a longer period as specified under tax rules. |
| Tax Rate | May be taxed at a specified rate or the investor’s applicable slab rate, depending on the scheme. | May be taxed at a separate rate applicable to long-term gains. |
| Exemption | Generally does not have the same LTCG exemption threshold. | For equity funds alone, gains upto ₹1.25 lakh in a financial year are exempted. |
Short-term capital gains tax rate for mutual funds in 2026
Before looking at the rates, it helps to understand how mutual funds are grouped for tax purposes:
● Equity-oriented mutual funds generally invest at least 65% of their assets in shares of domestic companies, subject to the applicable tax rules.
● Specified mutual funds invest more than 65% of their assets in debt and money-market instruments. Debt funds fall under this classification.
● Other non-equity funds may include gold funds, international funds and some hybrid funds that do not fall into either of the above categories.
● A fund of funds (FoF) isclassified for tax purposes according to where it invests.
⮚ An FoF qualifies as equity-oriented if it invests at least 90% of its proceeds in units of another fund traded on a recognised stock exchange, and that underlying fund invests at least 90% in listed shares of domestic companies.
⮚ An FoF qualifies is taxed as a debt fund if it invests at least 65% of its proceeds in a fund that invests more than 65% in debt and money-market instruments
⮚ Gold FoFs, international FoFs and other FoFs that do not meet either set of conditions are generally treated as other non-equity funds.
The scheme’s tax treatment depends on its actual portfolio and structure, not only on the name of its category.
STCG taxability for various mutual fund categories
| Mutual fund category | Holding period for short-term gains | STCG tax rate |
| Equity-oriented mutual funds | Units held for 12 months or less | 20% |
| Debt-oriented mutual funds purchased on or after 1 April 2023 | Gains are treated as short-term regardless of how long the units are held | Applicable income tax slab rate |
| Dent-oriented mutual funds purchased before 1 April 2023 | Units held for 24 months or less | Applicable income tax slab rate |
| Listed gold, silver and international ETFs that are not debt-oriented | Units held for 12 months or less | Applicable income tax slab rate |
| Hybrid mutual funds with >35% but <65% equity | Units held for 24 months or less | Applicable income tax slab rate |
| Gold and international fund of funds | Units held for 24 months or less | Applicable income tax slab rate |
Additionally, Securities Transaction Tax conditions apply. Surcharge and 4% health and education cess are also additional. Tax treatment may differ for non-residents, companies and other categories of investors.
Short-term capital gains on other assets
The tax treatment of short-term capital gains (STCG) varies depending on the type of asset and its holding period.
Real estate: Land, buildings or both are treated as short-term capital assets when held for 24 months or less before transfer. STCG from such property is generally added to the taxpayer’s total income and taxed at the applicable income-tax slab rates.
Physical gold: Physical gold is treated as a short-term capital asset when held for 24 months or less. The resulting STCG is generally added to total income and taxed at the applicable slab rate.
Stocks and shares: Listed equity shares held for 12 months or less are treated as short-term and taxed at 20%.
Bonds: For listed bonds, the short-term holding period is generally 12 months or less, and STCG is generally taxed at the applicable slab rate. However, unlisted bonds or debentures transferred, redeemed or matured on or after 23 July 2024 are deemed to generate STCG irrespective of the holding period.
How to calculate short-term capital gains tax: An example
Let’s consider a simplified example to understand STCG on an equity-oriented mutual funds. Suppose you invest ₹1,00,000 in an equity-oriented mutual fund. After six months, the value of the units becomes ₹1,20,000 and you redeem the units. Assuming the entire gain qualifies as STCG under the applicable provisions, the short-term capital gain would be ₹20,000.
- Purchase value: ₹1,00,000
- Sale value: ₹1,20,000
- Short-term capital gain: ₹1,20,000 − ₹1,00,000 = ₹20,000
As this is an equity-oriented mutual fund, the STCG tax rate is 20%.
- STCG tax: 20% of Rs. 20,000 = Rs. 4,000
Thus, the base STCG tax in this simplified illustration would be ₹4,000, before applicable surcharge and health and education cess.
Example for illustrative purpose only
Tips for reducing taxes on short-term capital gains
Investors may be able to reduce their tax outgo in the following ways:
- Set off eligible capital losses: A short-term capital loss can be set off against short term or long-term capital gains in the same financial year.
- Carry forward unused losses: If the entire loss cannot be set off in the same year, the remaining amount can be carried forward for up to 8 tax years. The income tax return must be filed within the prescribed due date to claim this benefit.
- Check the holding period: The holding period determines whether gains are treated as short term or long term (except in the case of specified mutual funds, which include debt funds) Long-term capital gains tax rates are generally lower.
- Review individual purchase dates: If units were purchased through an SIP, each instalment has a separate purchase date. Units are generally treated as redeemed on a First In, First Out basis.
Impact of Budget 2024 on mutual fund STCG tax
The Union Budget 2024 revised the taxation of short-term capital gains (STCG) on mutual funds. For equity-oriented mutual funds, the STCG tax rate was hiked from 15% to 20%.
For debt mutual funds, indexation benefits on investments made before April 1, 2023, were removed. For those investments, short-term capital gains are taxed at income tax slab rates for units held for less than 24 months and LTCG is taxed at 12.5%.
For hybrid funds with more than 35% but less than 65% in equities, STCG continues to be taxed as per the investor’s tax slab. However, the holding period to qualify for STCG has been reduced from 36 months to 24 months.
The increase in STCG rates for equity funds are meant to encourage long-term investing and discourage people from redeeming money on impulse or due to short-term volatility.
Conclusion
Understanding short-term capital gains tax may help investors in making informed investment decisions. By knowing how STCG is calculated and taxed, you can strategically plan your investments to minimise tax liabilities. Remember, while taxes are an important consideration, they should not be the sole factor in your investment decisions. Investors may also consider the potential post-tax impact of a transaction alongside their financial goals, risk appetite, investment horizon and overall asset allocation. Since tax rules may change and their application may depend on individual circumstances, investors may consider consulting a qualified tax professional for advice specific to their situation.
FAQs
What is the tax rate on short-term capital gains?
For equity-oriented mutual funds and listed equity shares, STCG is generally taxed at 20%. For other assets, such as debt-oriented mutual funds, unlisted shares, and real estate, short-term gains are added to your total income and taxed according to your applicable income tax slab rate.
What is the exemption of capital gains tax?
Short-term capital gains typically do not qualify for such exemptions and are fully taxable.
How do you avoid short-term capital gains tax?
There is no general method that allows investors to avoid STCG tax. Investors may understand the applicable holding-period rules, accurately account for eligible capital losses and maintain appropriate transaction records. Investing in tax-saving avenues listed under Section 80C of the old regime of the Income Tax Act, 1961, can also reduce your net taxable income.
What is the time period for short-term capital gains?
The holding period for short-term capital gains varies by asset type. For equity shares and equity-oriented mutual funds, the holding period is less than 12 months. For other assets, it is less than 24 months. Meanwhile, capital gains on debt-oriented mutual funds qualify as short-term capital gains, regardless of the holding period.
How is STCG tax calculated for SIP investments in mutual funds?
STCG applies when equity mutual fund units are sold within 12 months of purchase. In SIPs, each instalment is treated separately, so only units held for less than a year attract STCG. For equity funds, the tax is 20% plus surcharge and cess, while debt funds are taxed as per your income slab.
Are there exemptions available on STCG for mutual funds?
No exemptions apply to equity mutual fund STCG, which is taxed at 20%. For debt funds, short-term gains are added to your income and taxed as per your slab. While direct exemptions aren’t available, investors can lower tax liability through strategies like tax-loss harvesting or setting off capital losses.
Does STCG tax apply differently for NRIs?
Yes. Tax treatment for non-resident investors may differ from that applicable to resident investors depending on the nature of the mutual fund, the type of gain, the investor’s residential status and applicable tax provisions. Tax may also be deducted at source in applicable cases. An eligible NRI may be able to claim benefits under an applicable Double Taxation Avoidance Agreement (DTAA).
Can I set off short-term capital losses against short-term capital gains?
Yes. Short-term capital losses may be set off against short-term capital gains. This is a very common approach in tax management.
Is STCG included in my total income for tax slab calculations?
STCG forms part of total income, but its tax treatment depends on the nature of the asset and applicable provisions. Certain STCG are taxed at a specified rate rather than the applicable slab rate, while others may be taxed at applicable slab rates.
