Everything you Need to Know about Short Term Capital Gain Tax on Mutual Funds

A mutual fund is a means by which individuals can pool their funds and a professional manages it. It unites like-minded investors with a common objective and invests in equities, debt instruments and other securities. The sole purpose is increasing investors’ money over time.

This investment avenue has really caught up in the last few years. However, as with every good investment, these have a certain tax aspect to them. Therefore, if you redeem your mutual fund units within a very short time period, you are liable to pay taxes on these gains. Knowing these short term capital gains tax brackets will guide you in making sound investment decisions.

What is Short-Term Capital Gain (STCG) Tax on Mutual Funds?

STCG on mutual funds applies when you sell equity or debt mutual funds within a specific holding period.

• For equity mutual funds, STCG is applicable if sold within 1 year.
• For debt mutual funds, STCG applies if sold within 3 years.

The short term capital gains tax brackets differ for equity and debt funds. Let’s see how they work. 

How STCG Taxation Works

STCG taxation depends on the type of mutual fund and the investor’s total income:

Equity mutual funds

If you redeem the equity mutual fund units within 1 year, you’ll be charged 15% as a flat tax. If, for instance, you invest in units of ₹1 lakh and redeem them in six months for ₹1.2 lakhs, your short-term capital gain is ₹20,000. With 15% as tax, you’ll pay ₹3,000 and be left with a net gain of ₹17,000.

Debt mutual funds

If you redeem debt mutual funds within 3 years, the gain is treated as your income and taxed at your slab rate. Suppose you earn ₹12 lakh annually and receive ₹50,000 as short-term capital gain on debt mutual funds. Your overall income for taxation will be ₹12.5 lakhs. Suppose you are taxed at 30%. Your STCG tax would be ₹15,000. Naturally, being in a higher tax bracket will result in a higher tax outflow.

Exemptions and Deductions

Wondering if there’s an exemption STCG on mutual funds? Unfortunately, no exemptions or indexation benefits are available for STCG. But playing it smart can help reduce the tax burden.

• Harvesting gains: Selling only up 1.25 lakhs, which is the tax-free limit and reinvesting.
• Investing in tax-efficient funds: Holding investments for a longer duration to qualify for lower long-term capital gains tax.
• Offsetting gains with losses: If you incur losses from other investments, you can set them off against STCG to reduce your taxable income.
• Using tax-saving instruments: Investing in tax-saving instruments like ELSS funds (Equity Linked Savings Schemes) can help minimize STCG taxation in the long run.
• Use Systematic Withdrawal Plans (SWP): Instead of selling all at once, an SWP can help you withdraw a smaller portion of your investment over time, reducing overall tax liability.

Why Did the Government Increase the Tax on Short Term Capital Gains?

The reason is simple, to encourage long-term investments and reduce market speculation. Higher taxes on short-term profits push investors to hold their investments for a longer period. This will eventually lead to a more stable financial market.

Another reason is to increase tax revenue from short-term profits made by traders and investors. This change is in line with the government’s larger financial policies to strengthen economic stability.

Knowing short term capital gain on mutual funds helps you save money. If you trade mutual funds often, tax impact matters. But what if you need quick funds and don’t want to sell your investments?  There’s a smarter way to get cash without liquidating your portfolio. A Loan Against Mutual Funds with Fibe can save the day. You can get a cash loan against your mutual funds without selling them and incurring extra taxes. 

At Fibe, you can borrow up to 80% of your mutual fund’s value. Get up to ₹10 lakhs instantly with a quick, hassle-free process. Access cash without selling your investments. The best part is that you can keep growing your wealth all while managing tax efficiently!

FAQs

1. What is the tax rate on short-term capital gains?

The short term capital gain on mutual funds depends on the type of mutual fund:

• Equity mutual funds: Flat 15% tax (plus cess and surcharge) applies if sold within 1 year.
• Debt mutual funds: Taxed at your income tax slab rate if sold within 3 years. 

2. What is the exemption of capital gains tax?

There are no specific exemptions available for short term capital gain on mutual funds. Unlike long-term capital gains, tax on short term capital gains does not qualify for indexation benefits. However, you can offset STCG with short-term capital losses from other investments to reduce your taxable amount.

3. Why did the government increase the STCG tax rate?

The government raised tax on short term capital gains to discourage quick trades and encourage long-term investing. Higher taxes on short-term gains make frequent buying and selling less appealing, helping to stabilise the market. It also boosts tax revenue from short-term investments.