Short-Term Capital Gains Tax on Debt Funds Explained

Last Updated: 19 Sep 2025

Getting Started With Short Term Capital Gain Tax (STCG)

Investors usually try to understand the risk and returns before investing in a mutual fund. They want their investment in different funds to witness capital appreciation. However, a factor that many investors oversee is taxes levied on the returns.

For example- You open a fixed deposit account and earn returns at an interest rate of 8% to 9%. The returns that you gain are taxed as they earned income when you file for taxes.

The same applies to mutual funds as well. The returns earned on mutual funds too are taxed.

What are the Gains on Mutual Funds?

Mutual funds are an instrument which collects money from the investors, invests them in different funds, and offers returns. The objective of mutual fund investment depends on the guidelines of the investor and expertise of the financial organisation.

There are two forms of returns in mutual funds-

• Capital Gains
• Dividends

While capital gains are the profits an investor receives after selling a mutual fund unit, the dividend is the returns earned when a fund pays interest.

However, both the returns are taxed. While you only look at returns from a mutual fund, you will also need to understand the tax that you will have to pay for the profits you make. Capital gains are taxed on the hands of the investor, while the fund organisation must pay the tax on returns earned on the dividend.

What is Capital Gain?

Capital gain is an increase in the value of a fund over time. It is the difference between the purchase value of a fund and the selling value of a fund.

The government taxes the capital gains that you earn. The type of mutual fund and the period of the investment impact the tax. There are two types of capital gains tax, such as Long Term Capital Gains Tax (LTCG) and Short Term Capital Gains Tax (STCG).

What is Short Term Capital Gain Tax on Mutual Funds?

Whenever an investor sells equity mutual funds within 12 months of purchasing to book profits and debt, or any other kind of mutual fund in less than 36 months of purchasing the units, then the profit made from the sale will be taxed under Short-term capital gain. For equity mutual funds, tax rate is 15% (plus applicable surcharge & cess) on gains. Meanwhile, Debt, or any other mutual fund, will be taxed as per the slab rate.

How to Calculate Short-Term Capital Gains?

Short-term capital gains occur when an asset is sold within 36 months of purchase (12 months for equity shares or mutual funds). The formula is:

Selling Price – Transfer Expenses – (Purchase Cost + Improvement Cost) = Short Term Capital Gain

Example
You bought equity shares for ₹1,00,000 and sold them within 8 months for ₹1,40,000. Brokerage and charges were ₹2,000.

Selling Price = ₹1,40,000
Less Expenses = ₹2,000
Less Purchase Cost = ₹1,00,000
Short Term Capital Gain = ₹38,000
This gain will be taxed as per applicable rules.

How is Short-Term Capital Gains taxed?

When an investor holds a mutual fund for a short period and then redeems it, the gains are categorised as short-term capital gains (STCG). The short term debt fund taxation depends on the type of fund:

1. Equity Funds

• It must have at least 65% of its portfolio in equities.
• If sold within 12 months, the gains are treated as STCG.
• Tax rate: 15% under Section 111A, plus applicable cess.

2. Debt Funds

• It includes corporate bonds, government securities, and treasury bills.
• If sold within 36 months, the gains are considered STCG.
• Tax rate: As per the investor’s income tax slab (5%, 20%, or 30% depending on income).
• A 4% cess is also applicable.

3. Hybrid Funds

• Hybrid funds combine both equity and debt.
• If equity exposure is 65% or more, they are taxed like equity funds (15% STCG if redeemed within 12 months).
• If equity is less than 65%, they are treated like debt funds, and STCG is taxed as per the income tax slab rate.

Conclusion

It is essential to know what your mutual fund investments imply in terms of taxes. Investors need to pay attention to the debt short term capital gain tax they would incur while focusing on the returns they would earn. Particularly, this is crucial for a short-term investment. The law implies relatively different treatment for equity and debt funds. The STCG is set at 15% in the case of equity mutual funds.

The structure of STCG on mutual funds is different, though, with a 36-month holding period and gains that are taxed at the investor’s income tax slab rate. This implies that the STCG on debt mutual funds may be higher for people in higher tax brackets. Additionally, the applicable debt fund short term capital gain tax is increased by a 4% cess. To optimise your total returns, it is crucial to take into account the tax implications before investing, particularly the STCG on debt mutual funds.

Frequently Asked Questions

1. How can I show my debt mutual fund income in the ITR?

To report your income from STCG on debt mutual funds in the ITR, include it under the “Capital Gains” section. Specify the gains under “Short Term Capital Gains” and provide the holding period, the amount earned, and applicable taxes based on your income tax slab.

2. Are indexation benefits removed from debt mutual funds?

Yes, from April 2023 onwards, the government removed indexation benefits for STCG on debt mutual funds. Earlier, indexation allowed investors to adjust the purchase price to inflation, reducing taxable gains, but now these gains are taxed as per the investor’s income tax slab without this benefit.

3. Will tax be deducted automatically from mutual funds?

Tax is not automatically deducted at source for STCG on debt mutual funds. Investors are required to declare these gains while filing their income tax returns and pay the applicable taxes based on their tax slab, ensuring compliance with tax regulations.

4. Is STCG exempt up to 1 lakh?

No, the exemption of ₹1 lakh applies only to long-term capital gains on equity funds. For STCG on debt mutual funds, there is no exemption. The short-term capital gains are taxed based on the investor’s income tax slab without any threshold limit.

5. What is short term capital gain on SIP?

The STCG on debt mutual funds through a SIP is calculated for each installment. If you redeem units within 36 months of each SIP investment, the gains are treated as short-term and taxed according to your income tax slab rate. Each SIP installment has a separate holding period.