Short Term Capital Gains Tax (STCG)

What is Capital Gain Tax?

Capital Gain Tax is applicable when an individual sells capital assets like residential property, stocks, bonds, mutual funds, etc. It is applicable for both movable and immovable capital assets. Capital Gains Tax is of two types: Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG). The transaction of a capital asset is taxable with the applicable rate of LTCG or STCG tax rate along with the cess and surcharge levied on the sale of capital assets, under the Income Tax Act of India.

Let’s have a closer look at the applicability of short term capital gains tax.

What is Short Term Capital Tax?

Short Term Capital Gain Tax is applicable on the transaction when a capital asset is sold before the period of 12 months to 36 months from the date of acquisition (depending upon the type of asset). 

Short Term Capital Gain Tax on Mutual funds

1. STCG on Equity Mutual Funds -  The gains are treated as Short Term Capital Gains (STCG) from the sale of equity mutual funds when the mutual fund units are sold before the 12 month period from the date of investment. The STCG is taxed at a rate of 15% along with cess and surcharge. 
2. STCG on Debt Mutual Funds - The gains are treated as Short Term Capital Gains from the sale of debt mutual funds when units are sold before the 36 months period from the date of investment. STCGs in debt mutual funds are added to the income of the investor and taxed as per the tax slab of the investors. 

Calculation of Short Term Capital Gain Tax on Mutual Funds:

On Equity Mutual Funds:

Suppose, if we invested ₹1,50,000 on 1st July 2018 in an equity mutual fund. And then we sold our holdings on 1st October 2018 i.e after 3 months at the value of ₹2,00,000. Then the gains on selling mutual fund units will be treated as short term capital gains for taxation purposes. The gains will be taxed with STCG tax at the rate of 15%.

The total gain will be ₹50,000 (₹2,00,000 - ₹1,50,000). And the STCG tax will be applicable on the amount of gain.

STCG is 15% of the taxable amount= 15% * ₹50,000 = ₹7,500.

On Debt Mutual Funds:

Suppose, if we invested ₹50,000 on 1st July 2018 in a debt mutual fund. And then we sold our holdings on 31st June 2020 i.e after 24 months at the value of ₹70,000. Then the transaction will be applicable for the STCG tax under the Income Tax Act.

The total taxable amount will be ₹20,000 (₹70,000 - ₹50,000).

The gain of ₹20,000 will be taxed as per the income tax slab of the investor under the Income Tax Act, 1961.

Long Term Capital Gains Tax vs Short Term Capital Gains Tax

• Long Term Capital Gains(LTCG) Tax is applicable on the gains where the holding period of the asset is for the long term. The holding tenure to be treated for LTCGs can be different across assets. It can be equal to a minimum holding requirement of 12 months to 36 months (depends on the type of capital assets) from the date of acquisition. Whereas, Short Term Capital Gains (STCG) tax is applicable on the gains from the transaction done before the 12 months or up to 36 months (depends on the type of capital asset) from the date of acquiring.
• Long Term Capital Gain Tax is 10% for equity mutual funds and equity securities Whereas, Short Term Capital Gains Tax is 15% for equity mutual funds and equity securities.
• LTCGs are eligible for a tax exemption of ₹1,00,000 per financial year but only for equity instruments like equity, equity mutual funds, etc. While, STCG doesn’t give any tax exemptions under the Income Tax Act, 1961.
• In the case of debt mutual funds, long-term capital gains tax is applicable when the units are sold after a holding period of 36 months. The LTCG tax at the rate of 20% after indexation is applicable on the gains while selling units. And short term capital gains tax is applicable when the units are sold within 3 years of purchase. The STCG tax is applicable as per the income tax slab rate of the investors. 

Frequently Asked Questions (FAQs)

1. What is Capital Gains Tax?

Capital Gains Tax is taxed when someone gains from the transaction of selling their capital assets like land or property, vehicles, bonds, equity instruments, mutual funds, etc. There are two types of capital gains tax: Long Term Capital Gain(LTCG) Tax and Short Term Capital Gain (STCG) Tax.

2. What is STCG?

STCG stands for Short Term Capital Gains. STCG tax is applicable on the sale transaction of any capital assets done held for a short term. If the asset is sold within the government-defined holding period for short term gains, then the gains are taxed with STCG tax. 

3. What is the holding period for equity and equity mutual funds to be taxed with STCG Tax?

STCG is taxed when the investors sell their holdings before the period of 12 months for equity and equity mutual funds.

4. Is STCG applicable on the sale of equity securities?

Yes, STCG is applicable to the sale of the equity shares under Section 111A of the Income Tax Act, 1961.

5. What is the STCG tax rate for equity and equity mutual funds?

STCG is taxed at 15% of the total capital gain for the equity and equity mutual funds.

6. Does STCG tax give the benefit of indexation in debt mutual funds?

No, STCG doesn’t give the benefit of indexation in debt funds. Indexation benefits are only applicable in the case of LTCGs i.e where units are held for more than 3 years.