- 1. STCG on Equity Mutual Funds
- 2. STCG on Debt Mutual Funds
- 3. STCG on Hybrid Mutual Funds
- 4. STCG on SIPs (The "FIFO" Rule)
- Important Points to Remember
- Conclusion
When you sell your mutual fund units for a profit, that profit is called a "Capital Gain." If you sell those units within the applicable short-term holding period (which depends on the type of fund), the profit is classified as a Short-Term Capital Gain (STCG) and is taxed accordingly.
The tax rate you pay depends on two things: the type of fund you invested in and how long you held your investment.
1. STCG on Equity Mutual Funds
A fund is considered "Equity-oriented" if it invests at least 65% of its money in Indian stocks. This includes Large-cap, Mid-cap, Small-cap, and hybrid funds that maintain at least 65% equity exposure.
- Holding Period: If you sell your units within 12 months (1 year) of purchase.
- Tax Rate: 20% on the total profit.
(Note: Before July 23, 2024, this rate was 15%. The new 20% rate applies to all equity units sold on or after July 23, 2024.)
Example:
You invested ₹1,00,000 in an equity fund in October 2024. You sold it in May 2025 (after 7 months) for ₹1,20,000.
- Profit: ₹20,000
- STCG Tax (20%): ₹4,000
- In-hand Profit: ₹16,000 (excluding cess/surcharge).
2. STCG on Debt Mutual Funds
Debt funds invest in fixed-income instruments like government bonds and corporate deposits. Following the 2023 and 2024 tax changes, the taxation of debt funds has become very simple.
- Holding Period: For any debt fund purchased after April 1, 2023, all gains are treated as short-term, regardless of how long you hold them.
- Tax Rate: Taxed as per your Income Tax Slab Rate.
The above rule applies only to debt funds purchased on or after April 1, 2023.
Example:
You are in the 30% tax bracket. You made a profit of ₹10,000 by selling a debt fund.
- STCG Tax: 30% of ₹10,000 = ₹3,000.
- In-hand Profit: ₹7,000.
3. STCG on Hybrid Mutual Funds
Hybrid funds invest in a mix of both equity and debt. Their tax treatment depends on the percentage of equity (stocks) they hold:
- Equity-Oriented Hybrids (Equity ≥ 65%): These include Aggressive Hybrid and Arbitrage funds. They are taxed exactly like Equity Funds.
- STCG (held < 12 months): 20%
- Debt-Oriented Hybrids (Equity ≤ 35%): These include Conservative Hybrid funds. They are taxed exactly like Debt Funds.
- For investments made on or after 1 April 2023: All gains are taxed as per your Income Tax Slab Rate, regardless of holding period.
- Balanced or Multi-Asset Hybrids (Equity 35% to 65%):
- STCG (held < 24 months): As per your Tax Slab
4. STCG on SIPs (The "FIFO" Rule)
Taxation on SIPs is slightly more complex because every monthly instalment is treated as a new investment. To calculate the tax, the "First-In, First-Out" (FIFO) method is used. This means the units you bought first are considered the ones you sold first.
Example:
You started a monthly SIP in January 2024. In February 2025, you decide to sell all your units.
- The units bought in January 2024 have completed more than 12 months. They will be taxed as Long-Term (LTCG).
- The units bought from February 2024 to December 2024 have NOT completed 12 months. The profit on these units will be taxed as Short-Term (STCG) at 20%.
Summary Table: STCG Tax Rates (Post-Budget 2024)
| Fund Type | Short-Term Holding Period | STCG Tax Rate |
| Equity Funds | Less than 12 months | 20% |
| Debt Funds | Any duration* | As per your Tax Slab |
| Hybrid Funds (≥65% Equity) | Less than 12 months | 20% |
| Hybrid (35% to 65% Equity) | Less than 24 months | As per your Tax Slab |
| Hybrid Funds (≤35% Equity) | Any duration* | As per your Tax Slab |
*For investments made after April 1, 2023.
Important Points to Remember
- No Basic Exemption: Unlike Long-Term Capital Gains (where the first ₹1.25 Lakh of profit is tax-free), STCG has no tax-free limit. You pay tax on every rupee of short-term profit.
- Cess and Surcharge: A 4% Health & Education Cess is added to your final tax amount.
- Tax Loss Set-off: If you have a short-term loss in one fund, you can use it to "offset" or reduce the tax you owe on a short-term gain from another fund.
- Indexation: No indexation benefits available on short-term capital gains.
Conclusion
Short-term capital gain tax can significantly eat into your profits, especially with the recent hike to 20% for equity. If your financial goal allows it, holding your equity investments for more than 12 months is usually more tax-efficient, as the tax rate drops to 12.5% and you get an annual tax-free limit of ₹1.25 Lakh.