Short Term Capital Gain
Also written STCG · Short Term Capital Gain (STCG) · Short-term capital gain (STCG)
The gain on mutual fund units sold within the holding period — 12 months or less for equity-oriented funds, 24 months or less for most others — taxed at 20% for equity funds and at slab rate otherwise.
In plain language
A capital gain is short-term when the units are sold before they have been held long enough to qualify as long-term. The Income Tax Act uses just two holding periods: 12 months for listed securities and units of equity-oriented funds, and 24 months for all other assets.
So units of an equity-oriented fund sold within 12 months give a short-term gain; units of a hybrid fund with 35 to 65 per cent in domestic equity, or of a fund of funds, sold within 24 months give a short-term gain.
The tax then depends on the kind of fund:
- Equity-oriented funds — short-term gains taxed at 20 per cent.
- Almost everything else — short-term gains added to income and taxed at the investor's marginal slab rate (MSR).
These are the rates for units redeemed on or after 23 July 2024, following the Union Budget presented in July 2024. Units redeemed earlier follow the old rates.
How it works
Short-term gains across the workbook's table:
| Investment asset | STCG rate | Short-term if sold within |
|---|---|---|
| Equity-oriented funds (incl. hybrids with more than 65% in equity) | 20% | 12 months |
| Hybrid funds with 35% to 65% in domestic equity | MSR | 24 months |
| Other MFs (fund of funds, international funds) | MSR | 24 months |
| Equity ETFs | MSR | 12 months |
| Gold ETFs | MSR | 12 months |
| Debt-oriented funds and debt ETFs | MSR (no separate long-term rate in the table) | — |
A short-term capital loss is more flexible than a long-term one: it can be set off against short-term or long-term capital gains. It still cannot touch any other head of income, and unabsorbed losses carry forward for 8 years. One limit applies to mutual funds specifically: under the bonus stripping rule, a loss on units bought within 3 months before a bonus record date and sold within 9 months after it is disallowed.
Alongside the tax, a redemption of an equity-oriented fund attracts Securities Transaction Tax, paid by the seller: 0.001 per cent on sale of units to the mutual fund or on a delivery-based exchange sale. STT does not apply to purchases, or to debt schemes.
There is no TDS on re-purchase proceeds for resident investors; for certain non-resident investments TDS applies, at the lower of the Income Tax rate and the relevant DTAA rate.
A worked example
Arjun invested Rs 3,00,000 in a large-cap equity fund and redeems 9 months later for Rs 3,45,000. In the same year he redeemed a different equity fund at a short-term loss of Rs 15,000. He is a resident individual; the amounts are illustrative.
Short-term gain on first fund = 3,45,000 − 3,00,000 = Rs 45,000
Less: short-term loss on second fund = Rs 15,000
Net STCG = Rs 30,000
Tax at 20% = Rs 6,000
STT on the redemption: 3,45,000 × 0.001% = Rs 3.45. No TDS is deducted, because he is resident.
Had he waited three more months — past 12 months — the Rs 30,000 would have been a long-term gain and, if it was his only long-term gain that year, fully covered by the Rs 1.25 lakh exemption. Waiting would have saved Rs 6,000.
Now change the fund. If the same Rs 45,000 gain had come from a fund of funds held for 9 months, it would be taxed at his marginal slab rate — at a 30 per cent slab, Rs 13,500 before the loss set-off. And if he had held that fund of funds for 20 months, it would still be short-term, because its holding period is 24 months.
Why NISM asks about it
Chapter 8 (Taxation), section 8.2, gives the holding periods and the STCG column of the rate table; section 8.5 covers set-off and bonus stripping; section 8.6 covers STT; section 8.8 covers TDS. Expect recall of the 20 per cent rate, a classification question built on fund type and months held, and a set-off question on what a short-term loss may be set against. The chapter's sample question on which scheme's redemption attracts STT also sits here.
Common exam traps
- Equity-oriented STCG: 20 per cent. Most other funds: marginal slab rate.
- "Short-term" means 12 months or less for equity-oriented funds and 24 months or less for most others — gold and equity ETFs use 12 months.
- Short-term loss can be set off against short-term or long-term gains; long-term loss only against long-term gains.
- No capital loss can be set off against salary or any other head.
- STT applies only on the sale of equity-oriented fund units, not on purchase and not on debt funds.
- No TDS on redemption for resident investors. TDS at 10 per cent on IDCW above Rs 5,000 is a separate rule.
- Joint holders: the gain is taxed in the hands of the first holder.
Where this is taught
- Series V-A · Chapter 8: Taxationintroduced here
- Series XXI-A · Chapter 11: Taxationintroduced here
Related terms
- Securities Transaction TaxA central government tax collected by the exchange on the sell side of every futures and option trade — 0.05% of futures traded value, 0.15% of option premium, and 0.15% of settlement price on exercise.
- Bonus strippingBuying units shortly before a bonus issue and selling the originals at the halved NAV to manufacture a capital loss — a loss the Income Tax Act disallows inside a defined 3-month and 9-month window.
- GrandfatheringThe Budget 2018 provision that kept long-term gains on equity funds accrued up to 31 January 2018 tax-free, by treating the value on that date as the base for computing taxable gain.
- Equity-oriented fundA fund that puts at least 65% of its proceeds into listed domestic equity shares — the tax definition that unlocks the 12.5% long-term rate and the Rs 1,25,000 annual exemption.
- Long Term Capital GainThe gain on mutual fund units sold after the long-term holding period — 12 months for equity-oriented funds, 24 months for most others — taxed at 12.5% on equity funds above a Rs 1.25 lakh yearly exemption.
- Marginal Slab RateThe investor's own applicable income-tax slab rate. It taxes IDCW, short-term gains on most non-equity schemes, and all gains on debt-oriented funds and debt ETFs.
- Intra-head adjustmentSetting off a loss from one source against income from another source under the same head of income — the first step of loss relief, under section 108 of the Income Tax Act, 2025.
- Inter-head adjustmentSetting off a loss under one head of income against income under a different head — permitted by section 109 of the Income Tax Act, 2025, but only after intra-head set-off and subject to two bars.
- Speculative transactionUnder income tax, a transaction settled otherwise than by actual delivery. Exchange-traded currency derivatives are excluded by Section 43(5), so their gains and losses are non-speculative business income.
- Specified Mutual FundA mutual fund caught by section 50AA — gains on it are short-term no matter how long it was held, and are taxed at the investor's slab rate.
- Bonus sharesAdditional shares issued free to existing shareholders in proportion to their holding — no tax at allotment, a nil cost of acquisition, and a fresh holding period from the allotment date.
- Employee Stock Option PlanA right, not an obligation, for an employee to buy employer shares at a pre-fixed price — taxed twice: as a salary perquisite on exercise, and as capital gains on eventual sale.
- Telegraphic Transfer buying rateThe State Bank of India's telegraphic transfer buying rate for a foreign currency — the rate the Income Tax rules use to convert foreign-currency capital gains and income from securities into rupees.
- Carry forward of business lossTaking an unabsorbed business loss — including a loss on exchange traded derivatives — into later years: up to 8 assessment years, against business income only, and only if the return was filed by the due date.
- Deferment of taxesThe advantage of the growth option: scheme income is tax-exempt and capital gains are taxed only when units are sold, so returns compound for years before any tax is paid.
- Post-tax returnReturn after taxes on investment income and realised capital gains: pre-tax return × (1 − tax rate). It is what matters to the investor, but performance is communicated pre-tax.
- Income from other sourcesThe head of income under which interest and dividends earned in a PMS are taxed, at the investor's slab rate — with no indexation or capital gains benefit.
- Index ETFA mutual fund scheme that invests in securities in the same proportion as an index of securities and lists on an exchange; it is taxed exactly like a listed equity oriented fund.
- Long-term capital assetA capital asset held for more than the prescribed period before transfer — generally more than 24 months, and more than 12 months for listed securities and equity oriented fund units.
- Treasury BillA short-term Government of India debt instrument issued at a discount in tenors of 91, 182 or 364 days; it pays no interest, and the gain on redemption is taxed as a short-term capital gain.
- Unlisted equity sharesShares not listed on any recognised stock exchange in India: the long-term holding period is 24 months rather than 12, long-term gains are taxed at 12.50%, and short-term gains at normal rates.
- PGBPThe Income Tax Act head under which futures and options income earned through a PMS is taxed as business income, not as capital gains, regardless of whether the investor is resident or NRI.