Getting started with Short Term Capital Gain Tax (STCG)
Investors usually try to understand the risk and returns before investing in a mutual fund. They want their investment in different funds to witness capital appreciation. However, a factor that many investors oversee is taxes levied on the returns.
For example- You open a fixed deposit account and earn returns at an interest rate of 8% to 9%. The returns that you gain are taxed as they earned income when you file for taxes.
The same applies to mutual funds as well. The returns earned on mutual funds too are taxed.
What are gains on mutual funds?
Mutual funds are an instrument which collects money from the investors, invests them in different funds, and offers returns. The objective of mutual fund investment depends on the guidelines of the investor and expertise of the financial organisation.
While capital gains are the profits an investor receives after selling a mutual fund unit, the dividend is the returns earned when a fund pays interest.
However, both the returns are taxed. While you only look at returns from a mutual fund, you will also need to understand the tax that you will have to pay for the profits you make. Capital gains are taxed on the hands of the investor, while the fund organisation must pay the tax on returns earned on the dividend.
What is Capital Gain?
Capital gain is an increase in the value of a fund over time. It is the difference between the purchase value of a fund and the selling value of a fund.
For example- you invested Rs. 2 Lakhs in a mutual fund in the year 2019. But in the year 2020, the value of the fund became Rs. 2.10 Lakhs. The difference of Rs. 10,000 is capital gains.
The government taxes the capital gains that you earn. The type of mutual fund and the period of the investment impact the tax. There are two types of capital gains tax, such as Long Term Capital Gains Tax (LTCG) and Short Term Capital Gains Tax (STCG).
How is Short Term Capital Gains taxed?
When an investor stays invested in a mutual fund for a short time, be it for equity funds or debt funds, the profits earned from it are short term capital gains.
Equity schemes have 65% investment in equity funds. However, when the investment in equity is less than 65%, the investment becomes a debt fund. Equity mutual funds are schemes that have a stake in shares and stocks, while debt mutual funds invest in corporate bonds, treasury bills, government securities, etc. Unlike the short-term capital gains from equity funds, the short-term capital gains from debt funds are not taxed under Section 111A.
The tax rates vary for equity funds and debt funds. Short term capital gain tax on the mutual fund for equity funds is 15%. But short-term capital gains for non-equity investments are taxed as per the income tax slab rate of the investor. An investor can adjust short term capital losses against short term and long-term capital gains.
Fund
Period
Tax
Equity Funds
Up to 12 Months
15%
Non-Equity Funds
Up to 36 Months
Income Tax Slab Rate
The period of short term capital gain on a mutual fund is different for equity and debt funds. When an investor sells equity funds in 12 months after purchase, they become short term capital gains. A tax rate of 15% is applicable on the returns. But for debt fund, the period is up to 36 months. The tax rate on STCG on debt funds is as per the income tax slab of the investor. The tax rate of short-term capital gains will be 20% if the investor falls in 20% tax slab rate. The debt fund will also be charged 4% cess.
While you must research the returns of funds you want to invest in, you also need to find out how much tax you will have to pay.
On the flip side, capital gains are considered to be short-term or long-term based on how long the fund held the securities being sold. So even if you recently bought into the fund, you'll pay the preferential long-term capital gains rate (as long as the fund held the securities for more than a year).
The exemption limit is Rs.2,50,000 for resident individual of the age below 60 years whereas the exemption limit is Rs. 3,00,000 for resident individual of the age of 60 years or above but below 80 years. Also, for resident individual of the age of 80 years or above, the exemption limit is Rs.
Equity funds – Short-term capital gain on equity funds which are sold under-recognised stock exchanges are taxed according to Section 111A for 15%. These funds also incur Securities Transaction Tax (STT) which an investor pays from his end during the purchase or sale of funds.
The investor must pay taxes on the entire dividend income according to the income tax bracket under the heading "Income from Other Sources." The Mutual Fund scheme's dividend is also subject to TDS (tax deducted at source).
If the holding period is less than 12 months, the profits from the sale of equity funds are considered to be STCG and taxed at a flat rate of 15%. If the holding period is 12 months or more, the gains are LTCG and taxed at 10% without indexation benefits.
It is generally paid when your taxes are filed for the given tax year, not immediately upon selling an asset. Working with a financial advisor can help optimize your investment portfolio to minimize capital gains tax.
The resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax. However, most taxpayers will pay a tax rate of only 15% and some may even qualify for a 0% tax rate.
STCG is taxed at the taxpayer's slab rate. However, for listed equity shares, a unit of an equity-oriented fund, and a unit of a business trust, the concessional rate of 20% is applicable from 23rd July, 2024. In FY 24-25 any sale of such assets made till 22nd July, 2024 will attract tax rate of 15% only.
Short Term Capital Gains Tax, also known as STCG Tax, or STCGT is a tax levied on. The recent Union Budget 2024 declared that the short term capital gains from specified financial assets will be taxed at 20 percent instead of previous 15 percent.
However, starting from July 23, 2024, this rate will increase to 20%. This change means that gains from these investments will attract a higher tax rate, reflecting the government's policy adjustments.
Equity-oriented assets such as equity mutual funds are subject to STCG tax at a flat rate of 20% if held for less than 12 months. For example, if an investor sells equity shares after holding them for 9 months and earns a profit of Rs. 50,000, the STCG tax of 20% would apply to this gain.
All mutual funds, including index funds, are required to pay out any realized gains to shareholders on a pro-rata basis at least once a year. Typically, actively managed equity mutual funds do so annually in the form of short-term and long-term capital gains.
Some investors believe that when they reinvest dividends or capital gains—meaning they use the proceeds to buy more shares of the investment—that distribution becomes part of their investment return. But here's what really happens: When the distribution is reinvested, it's added to your cost basis.
The tax rate for STCG under Section 111A has been increased from 15% to 20%. This tax rate applies to equity investments such as: Equity shares. Units of equity-oriented mutual funds.
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