Short-Term Capital Gain Tax on Mutual Funds

Investing in mutual funds offers a flexible way to grow your wealth, but it also comes with tax implications that can affect your returns. One important tax to understand is short-term capital gains (STCG), which apply when you sell your mutual fund units within a short holding period and make a profit. Following Budget 2024, the taxation of STCG has changed, and it is important to understand these changes for better financial planning. This article will explain STCG for debt funds and equity funds and also provide tips to reduce its impact on your investments.

What is STCG on Mutual Funds?

Short-term capital gains (STCG) refer to the profits made from selling an asset held for a short period, typically less than 12 months. To calculate STCG, subtract the purchase price of the asset from the selling price.

STCG on equity mutual funds

Equity mutual funds invest predominantly in equity stocks, with at least 65% of their assets allocated to equities or equity-related instruments. According to Budget 2024, STCG on equity mutual funds is now taxed at a flat rate of 20%, an increase from the earlier 15%.

For example, if you sell equity fund units after 10 months and earn a profit of Rs. 40,000, you will pay 20% STCG tax, which amounts to Rs. 8,000.

STCG on debt mutual funds

Debt funds invest in fixed-income instruments like corporate bonds and government securities. The taxation of debt funds changed on April 1, 2023, when the government introduced Section 50AA, creating a new category called "specified mutual funds." Initially, these funds were defined as those with less than 35% exposure to domestic equities.

However, in Budget 2024, the government updated this definition, stating that specified mutual funds must invest at least 65% of their assets in money and debt market instruments.

As a result, any debt mutual fund or debt-oriented hybrid mutual fund purchased after April 1, 2023, will be treated as short-term capital gains for tax purposes. These gains will be taxed based on the investor's applicable tax slab rate, regardless of the holding period.

How to reduce STCG on mutual funds

1. Tax-loss harvesting

Selling assets that are performing poorly at a loss can offset your STCG. This helps you balance taxable gains with losses, thereby reducing your overall tax burden.

2. Hold investments for longer

The best way to avoid STCG tax is by holding your investments for more than 12 months. This way, you can qualify for Long-Term Capital Gains (LTCG), which are taxed at a lower rate than STCG.

3. Choose tax-efficient funds

Consider investing in tax-efficient mutual funds or exchange-traded funds (ETFs) designed for long-term investing. These funds focus on reducing short-term trading and can help lower your STCG liabilities.

To end

By understanding the tax implications of short-term gains on equity and debt funds, you can plan your investments more effectively. To start your investment journey, download the Tata Capital Moneyfy app. Here, you can track all your investments in one place and manage your portfolio from the comfort of your home.