What Is Short Term Capital Gain On Mutual Funds?
Short Term Capital Gain (STCG) on Mutual Funds refers to the profit earned from selling mutual fund units held for less than the required holding period. For equity mutual funds, units held for less than 1 year generate STCG taxed at 15% with no exemptions. For debt mutual funds, units held for less than 3 years generate STCG taxed as per income tax slab rates (5%, 20%, or 30%) with no indexation benefit. STCG is less tax-efficient than long-term gains, which is why holding mutual funds for the required periods is generally more beneficial.
STCG Tax Rates by Fund Type
| Fund Type | Holding Period | Tax Rate | Exemption/Indexation |
|---|---|---|---|
| Equity Mutual Funds | Less than 1 year | 15% | None |
| Debt Mutual Funds | Less than 3 years | As per tax slab (5%, 20%, 30%) | None |
STCG vs LTCG Comparison
Equity Funds: STCG vs LTCG
STCG: 15% tax, no exemption
LTCG: 10% tax (above ₹1 lakh), ₹1 lakh exemption
Example (₹1 lakh gain):
STCG Tax: ₹15,000
LTCG Tax: ₹0 (exempt)
Difference: ₹15,000
Debt Funds: STCG vs LTCG
STCG: Income tax slab (up to 30%), no indexation
LTCG: 20% with indexation
Example (₹1 lakh gain, 30% slab):
STCG Tax: ₹30,000
LTCG Tax: Often ₹0 (after indexation)
Difference: Up to ₹30,000
Final Thoughts
Short Term Capital Gain on Mutual Funds is taxed at higher rates with no exemptions, making it less tax-efficient than long-term gains. The tax structure is designed to encourage long-term investment by providing better tax treatment for funds held for the required periods (1 year for equity, 3 years for debt). While there may be valid reasons for short-term redemptions (liquidity needs, risk management), understanding the tax implications helps make informed decisions. Whenever possible, holding mutual funds for the required periods to qualify for long-term treatment can significantly reduce tax liability and improve after-tax returns.