Short Term Capital Gain Tax on Mutual Funds

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Short Term Capital Gain on Mutual Funds

Short term capital gain tax arises on a sale of a capital asset by the taxpayer. Mutual funds fall under the definition of a capital asset for the purpose of taxation in India. Hence, the redemption or sale of units of any mutual fund scheme is subject to capital gains. The classification of a short term and a long term capital gain depends on the period for which the investor holds the units of the mutual fund.

Hence to understand the applicability of capital gains you must understand the period of holding for each type of mutual fund scheme. The following table illustrates the period of holding and applicable tax rate for each type of scheme.

Type of Mutual Fund Scheme	Period of Holding	Tax Rate on STCG
Units of an equity-oriented fund STT Paid	Less than 12 months	15% plus surcharge and cess, as applicable
Units of a debt fund*	Less than 36 months	At Applicable Slab Rate for the Year
Balanced Funds (equity-oriented) STT Paid	Less than 12 months	15% plus surcharge and cess, as applicable
Balanced Funds (debt-oriented)*	Less than 36 months	At Applicable Slab Rate for the Year
Hybrid Mutual (equity exposure more than 65% of total investment) STT Paid	Less than 12 months	15% plus surcharge and cess, as applicable
Hybrid Mutual (equity exposure less than 65% of total investment)*	Less than 36 months	At Applicable Slab Rate for the Year

*Note: From April 1st 2023, capital gains from debt mutual funds will be taxed as per the investor’s income tax slab rate. This is irrespective of the holding period.

How to Calculate Short Term Capital Gain on Mutual Funds?

You can compute the short term capital gain tax on mutual funds by using the method shown in the following table:

Particulars	Amount
Full value of consideration	xx
Less: Expenditure incurred wholly and exclusively in connection with the transfer of capital assets (E.g., brokerage, commission, etc.).	xx
Net Sale Consideration	xx
Less: Cost of acquisition (i.e., the purchase price of the capital asset)	xx
Less: Cost of improvement (i.e., post purchases capital expenses on the improvement of capital assets)	xx
Short Term Capital Gain on Mutual Funds	xx

How to Calculate STCG on Equity Oriented Funds?

STCG on equity mutual funds scheme is quite straightforward. Any STCG arising from the sale of units of an equity fund is taxable at a rate of 15% plus surcharge and cess. Furthermore, it is quite obvious that the sale of units of an ELSS cannot lead to STCG. This is due to the fact that ELSS are subject to a lock-in period of 36 months. Hence, the resulting gain will always be a long term capital gain.

Illustration on Calculation of STCG on Equity Oriented Funds

Miss Puja invested in a large cap mutual fund scheme through an AMC on 1st August 2021. She purchases 100 units at a NAV of Rs 200 per unit. The mutual fund is an equity oriented mutual fund. She redeems 100 units of the scheme at a NAV of Rs 234 on 2nd July 2022. She paid securities transaction tax on the sale of these units.

Miss Puja held the units for less than 12 months. Hence, the resulting gain is STCG. Since the units belong to an equity mutual fund scheme the STCG will be taxable at a rate of 15%.

Particulars	Amount
Full value of consideration100 units at a NAV of Rs 234 per unit	Rs 23,400= (100*234)
Less: Expenditure incurred wholly and exclusively in connection with the transfer of capital asset (E.g., brokerage, commission, etc.).	Nil
Net Sale Consideration	Rs 23,400
Less: Cost of acquisition (i.e., the purchase price of the capital asset) 100 units at a NAV of Rs 200 per unit	Rs 20,000= (100*200)
Less: Cost of improvement (i.e., post purchases capital expenses on the improvement of capital asset )	Nil
Short Term Capital Gain on Mutual Funds	Rs 3,400
Tax on STCGRs 3,400 * 15%	Rs 510

How to Calculate STCG on Debt Mutual Funds?

STCG on debt mutual funds require a holding period of less than 36 months. The resulting short term capital gain is taxable at the slab rate applicable to the taxpayer. The slab rate is the rate at which the taxpayer pays tax depending on his or her net taxable income. You can read our article to know which tax slab is applicable to you.

Illustration of STCG on Debt Funds

Mr Amar is 28 years of age. He earned a salary income of Rs 12,00,000. He invested Rs 1,50,000 in ELSS. He purchased 150 units of a debt mutual fund scheme at a NAV of Rs 325 per unit on 2nd February 2020. On 3rd March 2022, he sold these units at a NAV of Rs 366 per unit.

Since the holding is less than 36 months the resulting gain will be a short term capital gain. This short term capital gain on debt funds will be taxable at the applicable slab rate. The following table shows the calculation of short term capital gains.

Particulars	Amount
Full value of consideration150 units at a NAV of Rs 366 per unit	Rs 54,900= (150*366)
Less: Expenditure incurred wholly and exclusively in connection with the transfer of capital asset (E.g., brokerage, commission, etc.).	Nil
Net Sale Consideration	Rs 54,900
Less: Cost of acquisition (i.e., the purchase price of the capital asset) 150 units at a NAV of Rs 325 per unit	Rs 48,750= (150*325)
Less: Cost of improvement (i.e., post purchases capital expenses on the improvement of capital asset )	Nil
Short Term Capital Gain on Mutual Funds	Rs 6,150

The following table shows the calculation of net taxable income and total tax payable

Particulars	Amount
Salary Income	Rs 12,00,000
Short Term Capital Gain on Mutual Funds	Rs 6,150
Total Taxable Income	Rs 12,06,150
Less Deduction Under Section 80C	Rs 1,50,000
Net taxable Income	Rs 10,56,150
Tax Payable:
Up to Rs. 2.5 lakh	Nil
Rs. 2,50,001 to Rs. 5,00,000	Rs 12,500
Rs. 5,00,001 to Rs. 10,00,000	Rs 1,00,000
Above 10,00,000	Rs 16,845(Rs 10,56,150 – Rs 10,00,000) * 30%
Total Tax Payable	Rs 1,29,345(Rs 12,500 + Rs 1,00,000 + Rs 16,845)

Applicable Tax Slab

Income	Tax Rate
Up to Rs. 2.5 lakh	Nil
Rs. 2,50,001 to Rs. 5,00,000	5% of the total income exceeding Rs. 5,00,000
Rs. 5,00,001 to Rs. 10,00,000	Rs. 12,500 + 20% of the total income exceeding Rs. 5,00,000
Above 10,00,000	Rs. 1,12,500 + 30% of the total income exceeding Rs. 10,00,000

How to Calculate STCG on Hybrid or Balanced Mutual Funds?

The taxability of a hybrid mutual fund is actually a combination of a tax on STCG on equity and debt funds. The equity oriented part of the scheme is taxable similar to an equity scheme. Likewise, an STCG on the debt oriented part of the hybrid fund is taxable similar to the debt fund. The period of holding and the tax rate are similar to that of the equity oriented and debt oriented parts of the scheme.

Frequently Asked Questions

Is short term capital gain on a mutual fund taxable?

Yes, short term capital gain on a mutual fund is taxable. There is no exemption on STCG from mutual funds. However, if you earn STCG on debt funds and the net taxable income including STCG is less than the basic slab rate then it is not taxable.

Which STCG is taxed at 30%?

The STCG on a debt mutual fund is taxable at the slab rate. Hence, if the applicable slab rate is 30% for the taxpayer for that year then the rate is 30%. It depends on other taxable income for the respective financial year. The STCG on an equity fund is taxable at a flat rate of 15%.

Is there any limit for short term capital gain?

No, there is no limit for short term capital gain. The entire short term capital gain is taxable at either a slab rate or a flat rate depending on the type of mutual fund scheme.