Short-Term Capital Gains (STCG) — Rules & Rates
Definition
Short-Term Capital Gains (STCG) arise when mutual fund units are redeemed before the specified minimum holding period. For equity-oriented funds (65%+ equity), the holding period threshold is 12 months — any redemption before completing 12 months triggers STCG. For debt-oriented and non-equity funds, the threshold is 24 months (reduced from 36 months by Budget 2024). For specified mutual funds (less than 35% equity, post April 2023), there is no concept of long-term — all gains are treated as short-term and taxed at the investor's income tax slab rate regardless of how long the units are held.
In Simple Words
A critical concept every distributor should master: the holding period is counted from the date of allotment to the date of redemption. For SIP investments, each installment has its own allotment date, so on redemption, the first-in-first-out (FIFO) method applies — the oldest units are sold first. Equity STCG was taxed at a flat 15% for years, but the July 2024 Budget increased it to 20% under Section 111A. This is a flat rate — regardless of whether an investor earns Rs 5 lakh or Rs 50 lakh annually, equity STCG is 20% plus applicable surcharge and cess. Debt fund STCG is added to the investor's total income and taxed at the applicable slab rate — this can be 0%, 5%, 20%, or 30% depending on the income bracket. A major change that reshaped the industry: from April 1, 2023 under Section 50AA (Finance Act 2023), all specified mutual funds — those with less than 35% in domestic equity — are taxed at slab rate regardless of holding period. This means liquid funds, overnight funds, gilt funds, money market funds, and most pure debt funds no longer have any long-term capital gains benefit. An investor in the 30% bracket pays 30% tax on gains whether units are held for 1 month or 10 years. Budget 2026 made no changes to these STCG rates, so they continue for FY 2026-27.
Real-Life Scenario
Rajesh, a 40-year-old IT manager in Bengaluru earning Rs 18 lakh annually (30% tax bracket), invests Rs 5,00,000 in each of three funds on January 15, 2024. He redeems all three on September 15, 2024 (8 months later). (1) Mirae Asset Large Cap Fund (equity, 95% equity allocation): His units grew to Rs 5,60,000. Gain = Rs 60,000. Since holding < 12 months, this is equity STCG taxed at 20% flat. Tax = Rs 60,000 x 20% = Rs 12,000. (2) HDFC Short Term Debt Fund (debt, 0% equity): His units grew to Rs 5,25,000. Gain = Rs 25,000. This is a specified MF (< 35% equity), so taxed at slab rate regardless of holding. Since Rajesh is in the 30% bracket, tax = Rs 25,000 x 30% = Rs 7,500. (3) ICICI Prudential Balanced Advantage Fund (hybrid, 70% equity): Units grew to Rs 5,45,000. Gain = Rs 45,000. Since equity-oriented (65%+ equity) and held < 12 months, equity STCG at 20%. Tax = Rs 45,000 x 20% = Rs 9,000. Total tax Rajesh pays: Rs 28,500 (plus 4% health and education cess on all).
Key Points to Remember
Formula
STCG Calculation: STCG = Redemption Value - Cost of Acquisition - Exit Load (if any) Tax on Equity STCG = STCG x 20% (flat rate, post July 2024) Tax on Debt STCG = STCG x Applicable Slab Rate Holding Period Thresholds: • Equity-oriented (>= 65% equity): 12 months • Non-equity (35-65% equity): 24 months • Specified MF (< 35% equity): No LTCG — always slab rate
Numerical Example
Example: Meena invests Rs 3,00,000 in an equity fund via SIP of Rs 50,000/month from Jan to June 2024. Allotment dates and NAVs: • Jan 5: Rs 50,000 at NAV Rs 100 = 500 units • Feb 5: Rs 50,000 at NAV Rs 102 = 490.20 units • Mar 5: Rs 50,000 at NAV Rs 98 = 510.20 units • Apr 5: Rs 50,000 at NAV Rs 105 = 476.19 units • May 5: Rs 50,000 at NAV Rs 110 = 454.55 units • Jun 5: Rs 50,000 at NAV Rs 108 = 462.96 units Total units = 2,894.10 Meena redeems 1,000 units on Oct 15, 2024 at NAV Rs 115. Redemption value = 1,000 x Rs 115 = Rs 1,15,000 Using FIFO: First 500 units from Jan (cost Rs 50,000) + 490.20 units from Feb (cost Rs 50,000) + 9.80 units from Mar (cost 9.80 x Rs 98 = Rs 960.40) Total cost = Rs 50,000 + Rs 50,000 + Rs 960.40 = Rs 1,00,960.40 STCG = Rs 1,15,000 - Rs 1,00,960.40 = Rs 14,039.60 Tax = Rs 14,039.60 x 20% = Rs 2,807.92 (plus 4% cess = Rs 112.32) Total tax payable = Rs 2,920.24
Frequently Asked Questions
Test Your Knowledge
4 questions to check your understanding
Ravi invests in an equity mutual fund on March 1, 2024, and redeems on January 15, 2025. His gains will be classified as:
Summary Notes
Equity STCG (holding < 12 months): flat 20% tax post July 2024 Budget (was 15% earlier)
Debt STCG (holding < 24 months): taxed at investor's income tax slab rate
Specified MFs (< 35% equity): ALL gains taxed at slab rate — no LTCG benefit at all (post April 2023)
FIFO method applies for SIP — each installment has its own holding period
Switch between funds = redemption + purchase — triggers capital gains tax on the first fund