New Short Term Capital Gain Tax on Shares/Mutual Funds FY 2025-26
Selling your shares or mutual funds within a year can lead to a tax surprise. Many investors, especially newcomers, are caught off guard by the short-term capital gains tax. You are not alone in this experience.
This guide is for anyone who trades stocks. It is also for those who invest in mutual funds. Additionally, it is intended for those who want to understand the short-term capital gains tax before making investment decisions. Whether you’re a beginner or experienced, knowing these tax rules can save you money.
We’ll walk you through the current short-term capital gains tax rate and how it applies to different investments. You’ll learn exactly how to calculate what you owe when you sell shares or mutual fund units quickly.
Ready to transform tax confusion into confidence? Let’s simplify everything you need to know about short term capital gains tax on shares/mutual fund.
What is Short Term Capital Gain Tax?
Short-term capital gains arise when you sell a capital asset within a specified holding period and make a profit. The “short term” classification depends entirely on how long you’ve held the asset before selling it.
For equity shares and equity-oriented mutual funds, any gain from selling within 12 months is a short term capital gain. For debt mutual funds and other assets, the revised threshold limit is typically 24 months.
This categorisation is significant because it directly affects your tax obligations. For example, you purchase shares valued at ₹10,000. Then you sell them for ₹12,000 within eight months. You make a profit. The resulting profit of ₹2,000 is considered a short-term capital gain on those shares.
The same principle applies to mutual fund units. Sell your equity fund units within a year for a profit. Then you’re looking at short-term capital gains tax on mutual fund investments.
Capital gains are treated differently from your regular income, like salary or business profits. The government views these gains as investment returns and has separate tax rules for them.
Investment gains can be a bit hit-or-miss, and sometimes they’re just on paper before you actually sell.
Analysis of Short Term Capital Gain Tax on Shares/ Mutual Funds
| Asset Type | Holding Period | Duration | Type of Gains | Tax Rate |
|---|---|---|---|---|
| Equity Shares | Holding Period | Less Than 12 Months | Short Term Capital Gains | Tax Rate @20% |
| More Than 12 Months | Long Term Capital Gains | Tax Rate @12.50% | ||
| Equity Mutual Funds | Holding Period | Less Than 12 Months | Short Term Capital Gains | Tax Rate @20% |
| More Than 12 Months | Long Term Capital Gains | Tax Rate @12.50% | ||
| Debt Mutual Funds | Holding Period | Less Than 12 Months | Always Short Term Capital Gains | Tax Rate as per Applicable Tax Slab |
| More Than 12 Months | Always Short Term Capital Gains | Tax Rate as per Applicable Tax Slab |
Short Term Capital Gains Tax Rate Applicable to Different Asset Categories:
Equity Shares/ Equity Mutual Funds: The short term capital gains tax rate varies significantly based on the asset type. Equity shares and equity-oriented mutual funds get preferential treatment. They have a flat 20% tax rate.
This rate applies regardless of the investor’s income tax bracket. This rate applies uniformly, whether the investor is in the 5% or 30% tax bracket.
Debt Mutual Funds: For debt mutual funds and other non-equity investments, short-term capital gains are considered regular income. They are classified as part of regular income. These gains are aggregated with other income and taxed according to the applicable income tax slab rates.
If you’re in the 30% tax bracket, your short-term gains from debt funds will face the 30% tax rate. The short term capital gain tax on Shares/ Mutual funds is given below:
| Asset Type | Short Term Capital Gains Tax Rate |
|---|---|
| Equity Shares | 20% (flat rate) |
| Equity-oriented Mutual Funds | 20% (flat rate) |
| Debt Mutual Funds | As per the applicable income tax slab |
| Real Estate Property | As per the applicable income tax slab |
| Gold/Commodities | As per the applicable income tax slab |
The 20% tax rate on equity investments is contingent upon the payment of Securities Transaction Tax (STT) on the transaction. While most recognised stock exchanges automatically collect STT, private transactions are not eligible for this preferential rate.
Short-Term Capital Gain Tax Vs Long-Term
Short-Term Capital Gains: The short-term capital gains tax is levied immediately, without any exemption limits. For equity investments, a tax rate of 20% is applied to every rupee of profit. Therefore, the timing of sales is of significant importance from a tax planning perspective.
Selling shares within 11 months of purchase can lead to substantial tax consequences. Waiting just one more month could allow you to avoid the 20% tax on the entire profit.
The holding period significantly impacts capital gains tax, creating a substantial difference between short-term and long-term investments. Long-term capital gains on equity shares and equity mutual funds are currently exempt from tax up to ₹1.25 Lakh per financial year, with any gains exceeding this threshold taxed at a rate of 12.5%.
Regarding debt investments, the holding period is now irrelevant. Whether held for over 12 months or less, both will incur STCG tax according to the applicable tax bracket.
The tax treatment significantly influences financial planning. Short-term capital gains require immediate tax liabilities. Long-term capital gains offer greater flexibility. The annual exemption allows for tax-free profit harvesting.
Short Term Capital Gains Tax on Shares
Holding Period Requirement for Equity Shares :
The holding period of equity shares is the determining factor for classifying capital gains as either short-term or long-term. Any profit from selling equity shares within 12 months is a short-term capital gain. The holding period starts the day after the purchase date. It ends on the date of sale.
This 12-month rule applies to all equity shares. It does not matter how you obtained them. You might have bought them through the stock exchange, received them as bonus shares, or acquired them through rights issues.
Short Term Capital Gains Tax Rate & Calculation Methods
Basically, the short-term capital gains tax on equity shares is a flat 20%, plus Cess. This rate stays the same regardless of your tax bracket. Other short-term gains get added to your regular income for tax purposes.
The calculation follows this simple formula:
- Short Term Capital Gains = Sale Price – Purchase Price – Transaction Costs
- Tax Liability = Short Term Capital Gains × 20% + Cess
| Details | Formula |
|---|---|
| Short Term Capital Gains | Sale Price − Purchase Price − Transaction Costs |
| Tax Liability | Short Term Capital Gains × 20% + Cess |
Securities Transaction Tax Impact on Overall Liability
Securities Transaction Tax (STT) plays a pivotal role in the calculation of short-term capital gains tax. Upon the sale of equity shares, STT is levied at a rate of 0.1% of the transaction value.
STT serves as a document of the transaction tax payment. It is also claimable as a deduction when computing capital gains.
The STT you pay reduces your overall tax burden. It is deducted from your sale proceeds before calculating the capital gains. For instance, if you sell shares worth ₹2,00,000, you pay ₹200 as STT. This ₹200 reduces your taxable capital gains.
STT ensures that your gains remain eligible for the 20% concessional tax rate. This helps you avoid taxation at your regular income tax slab rates. This scenario is particularly beneficial if you are in the highest tax bracket of 30%.
Short Term Capital Gain Tax on Mutual Fund
Short-Term Capital Gain Tax (STCG) on Mutual Funds: Equity and debt mutual funds are subject to different short-term capital gains tax regulations. These differences can significantly influence investment returns.
For equity mutual fund units held for 12 months or less, a flat tax rate of 20% is applicable. This rate applies irrespective of the investor’s income bracket. This rate applies to funds where at least 65% of the assets are invested in Indian equity shares.
Short Term Capital Gain Tax on Debt Mutual Fund
Debt mutual funds are taxed according to your regular income tax bracket for short-term gains. This means the tax rate could range from 5% to 30%, plus any applicable cess. This difference compared to equity funds can be significant, especially if you’re in the highest tax bracket.
Hybrid funds get classified based on their equity allocation. If equity exposure exceeds 65%, they’re treated like equity funds with the favourable 20% short term capital gains tax rate. Below 65% equity allocation means debt fund taxation rules apply.
So, as far as the debt mutual fund investments are concerned, any gains will attract a tax liability. This applies whether they are short-term or long-term in terms of holding period. So, the short term capital gain tax on the Debt Mutual Fund will be as per your income tax slab.
| Fund Type | Equity Allocation | Short-term Tax Rate |
|---|---|---|
| Equity Funds | ≥65% | 20% |
| Debt Funds | <65% | Income tax slab rates |
| Hybrid Equity | ≥65% | 20% |
| Hybrid Debt | <65% | Income tax slab rates |
This means that before investing in the debt mutual funds, it is crucial to know your tax bracket. Otherwise, you may end up paying a high tax on your capital gains.
Now there are no long-term debt mutual funds at all. Any gains from selling the debt mutual funds will be liable for the STCG tax. This applies even if the holding period is more than 12, 24, or 36 months. The tax will be charged as per your tax bracket.
If you are in the highest tax bracket of 30%, consider investing in equity-oriented mutual funds. You could save tax in the form of LTCG. Alternatively, you might pay STCG at 20% instead of paying a 30% tax on STCG from debt mutual funds.
It is not advisable to invest in equity-oriented mutual funds for a period of less than 36 months. Otherwise, it may distort your investment goals or objectives.
FAQ on Short Term Capital Gain Tax on Shares/ Mutual Funds:
1. How much short term capital gain is tax free?
It’s disappointing, but there’s no tax-free threshold for short-term capital gains. That’s right, you’ll need to pay a 20% short-term capital gains tax on every rupee of STCG. The Short Term Capital Gain Tax on Shares can reach 20%. This applies unless you hold the shares for more than 12 months.
2. Short-term capital gain tax on shares exemption
The finance budget 2025 specifies a threshold limit for long-term capital gains on shares or mutual funds. This limit is Rs. 1,25,000. However, the income tax department does not allow any exemption on the short term capital gain tax on shares.
Therefore, unfortunately, there is no exemption from short-term capital gains on shares or mutual funds.
3. How to reduce short-term capital gains tax
To reduce short-term capital gain tax, defer the holding period. It is highly recommended to extend it more than 12 months. Only then can you claim an LTCG exemption up to Rs. 1,25,000/- in a financial year.
While filing the Income Tax return, try to offset any previous years’ short term capital losses. Use these losses against the short term capital gains for this year.
