A Simple Guide to Short Term Capital Gain Tax on Mutual Funds (STCG)

It’s September, and with the festival season just around the corner, many of you might be thinking of redeeming some mutual fund units for shopping or travel. But wait! Before you click the 'redeem' button, there's one important thing we need to understand: taxes. I know, I know. Words like 'Short-Term Capital Gains Tax' or 'STCG' can sound pretty complicated and scary, often making you feel like you'll lose a huge chunk of your hard-earned profits.

Now, a common fear I hear is Will I lose all my profits to tax? Let me assure you, the answer is a definite NO. Don't worry at all! In the next few minutes, we are going to break down this topic step by step. By the end of this article, you will understand exactly what STCG is, how it's calculated, and how you can plan your investments better.

To begin, let’s first understand the core concept of a 'Capital Gain'

Without any jargon (been there). When you invest your money into any asset, whether it's a mutual fund, a stock, or even gold, you buy it at a certain price. Also, when you decide to sell that asset, you sell it at the prevailing market price. If the selling price is higher than your purchase price, the profit you make from this transaction is called a capital gain. In the world of mutual funds, you buy 'units' at a certain Net Asset Value (NAV). If you buy units when the NAV is ₹100 and sell them when the NAV has risen to ₹120, your capital gain is ₹20 per unit. It is this profit, this 'gain', that the government taxes, not your entire investment amount.

Actually, scratch that— now, we introduce the element of time...

which is what separates a 'short-term' gain from a 'long-term' gain. And the Income Tax department has defined specific holding periods to classify your gains, and this classification is extremely important because the tax rates are different for each. Now, the rules are different for equity funds and debt funds.

• For Equity Mutual Funds: If you sell your equity mutual fund units (this includes Large Cap, Mid Cap, Small Cap, Flexi Cap, and ELSS funds) within 12 months (or 1 year) from the date of purchase, the profit you make is classified as a Short-Term Capital Gain (STCG).
• For Debt Mutual Funds: The timeline here is longer. So if you sell your debt mutual fund units within 24 months (or two years) from the date of purchase, the profit is considered a Short-Term Capital Gain (STCG).

Understanding this time-based rule is the first and most critical step in decoding mutual fund taxation.

How is the Tax on Short term Gains from Equity Funds Calculated?

The rule for equity funds is very clear and uniform for all investors, irrespective of their income level. But your Short-Term Capital Gain is taxed at a flat rate of 20%. It's crucial to know that this rate was revised from 15% effective from July 23, 2024, so for any gains you book now, this new rate applies.

Let's take a practical example.

Imagine Priya, a 28-year-old software developer from Pune.

• She invested ₹50,000 in a Mid-Cap equity fund in January 2026.

Here's the thing:

• In September 2026, after just 8 months, she needs some money for a new laptop and decides to sell all her units. The value of her investment has grown to ₹60,000.

1. Step 1: Calculate the Capital Gain.
   Selling Price (₹60,000) - Purchase Price (₹50,000) = ₹10,000 (This is her STCG)
2. Step 2: Calculate the Tax on this Gain.
   Tax = 20% of ₹10,000 = ₹2,000.

So, Priya's tax liability is ₹2,000. Her net take-home profit from this investment is ₹8,000 (₹10,000 gain - ₹2,000 tax) (trust me on this). 

Here comes a slight twist when we discuss debt funds

Now let's pay close attention here, because this is where many new investors get confused. Unlike equity funds, the tax on short-term gains from debt funds is not a flat rate. Instead, the short-term capital gain is added to your total annual income, and then you pay tax on it according to your income tax slab. But this means the tax rate depends entirely on how much you earn.

Let's consider an example of Rohan...

a 25-year-old marketing executive from Delhi with an annual income of ₹7 lakhs.

• He invested ₹1,00,000 in a Short Duration Debt Fund in May 2025.

Here's the thing:

• In September 2026, after 16 months (which is less than 24 months), he redeems it for a festival expense. The value is now ₹1,06,000.

1. Step 1: Calculate the Capital Gain.
   Selling Price (₹1,06,000) - Purchase Price (₹1,00,000) = ₹6,000 (This as I write this is his STCG)
2. Step two: Add this Gain to his Total Income.
   Rohan's total taxable income for the year becomes ₹7,00,000 + ₹6,000 = ₹7,06,000.

Actually,

• Step 3: Apply his Income Tax Slab Rate.
  Under the new tax regime for FY 2025-26, income from ₹4 lakhs to ₹8 lakhs is taxed at 5%. So since Rohan's total income falls in this slab, his tax on the gain is 5% of ₹6,000 = ₹300.

Notice the difference? If Rohan's annual income was ₹15 lakhs, he would be in the 15% tax slab, and his tax on the same ₹6,000 gain would have been ₹900. Now, this makes understanding short-term capital gain tax on mutual funds, short-term capital gains tax, STCG on mutual funds, mutual fund taxation, short-term capital gain tax on equity funds, and short-term capital gain tax on debt funds for debt instruments directly linked to your personal income.

For a Quick and Easy Reference...

especially when you are on the move, here is a simple cheat sheet that summarises the key differences between the STCG treatment for equity and debt funds.

Conclusion

The concept of short-term capital gains has been demystified. Now, it REALLY is that simple once you break it down. And just remember the two golden rules for any short-term withdrawal: for Equity funds, the tax is a flat 20% on your profit and for Debt funds, the profit is added to your income and taxed as per your slab. Also, the critical factor that determines everything is the holding period. This entire subject of short term capital gain tax on mutual funds, short term capital gains tax, STCG on mutual funds, mutual fund taxation, short term capital gain tax on equity funds, short term capital gain tax on debt funds is now in your control.