Introduction
Investing in mutual funds is popular because they offer good returns and are convenient to manage. However, it’s important to understand the taxes you might have to pay, especially on short-term capital gains (STCG). This guide will explain what STCG is, how it’s taxed, and what you should know to make smart investment decisions.
What are Short-Term Capital Gains?
Short-term capital gains are the profits you make when you sell mutual fund units shortly after buying them. In India, these gains are considered short-term if:
- For Debt Funds: Held for less than 36 months (3 years)
- For Equity Funds: Held for less than 12 months (1 year)
If you hold the units longer than these periods, the gains are called long-term capital gains (LTCG).
Taxation of Short-Term Capital Gains on Equity Mutual Funds
Equity mutual funds invest mainly in stocks. Any mutual fund that invests at least 65% of its money in equities is considered an equity fund.
If you sell equity mutual fund units within 12 months, the profits are short-term capital gains. These gains are taxed at a flat rate of 15%, no matter what your income tax rate is.
Example: If you invest ₹1,00,000 in an equity mutual fund and sell it after 10 months for ₹1,20,000, you have a gain of ₹20,000. The tax at 15% would be ₹3,000.
Taxation of Short-Term Capital Gains on Debt Mutual Funds:
Debt mutual funds invest in things like bonds and treasury bills.
If you sell debt mutual fund units within 36 months, the profits are short-term capital gains. These gains are added to your total income and taxed according to your income tax rate.
Example: If you invest ₹1,00,000 in a debt mutual fund and sell it after 24 months for ₹1,10,000, and you are in the 30% tax bracket, the gain of ₹10,000 will be taxed at 30%, resulting in a tax of ₹3,000.
How to Calculate Short-Term Capital Gains
To calculate short-term capital gains:
- Determine the Sale Price: The amount you get from selling the mutual fund units.
- Subtract the Purchase Price: The amount you paid to buy the units.
- Account for Transaction Costs: Deduct any costs related to the sale, like brokerage fees and Securities Transaction Tax (STT).
Formula: Short term Capital Gain = (Sale Price – Purchase Price) – Transaction Cost
Important Considerations
- Indexation Benefit: Short-term capital gains don’t qualify for the indexation benefit, which adjusts the purchase price for inflation. This benefit is only for long-term capital gains on debt funds.
- Tax Deducted at Source (TDS): There is no TDS on capital gains from mutual funds for resident Indians. However, non-resident Indians (NRIs) are subject to TDS on capital gains.
- Set-Off and Carry Forward: Short-term capital losses can be used to offset both short-term and long-term capital gains in the same year. If losses remain, they can be carried forward for up to eight years to offset future gains.
Conclusion
Knowing the tax rules for short-term capital gains on mutual funds is important for smart investing. Equity mutual funds are taxed at a flat 15% rate on short-term gains, while debt funds are taxed according to your income tax rate. By understanding these rules, you can make better investment decisions and maximize your returns after taxes. It’s always a good idea to talk to a tax advisor or financial planner to make sure your investments fit with your overall financial goals and tax strategy.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.