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LTCG vs STCG, and how holding period changes what you owe.
Taxation is the part of investing most people put off understanding until it's time to file returns — and by then, decisions that could have saved money are already behind you. Mutual fund tax rules in India depend on two things: what the fund holds (equity or debt) and how long you held your units. Get these two right, and the rest of this lesson will make sense in one read.
A fund counts as "equity" for tax purposes if it holds at least 65% in domestic equities. Gains are split into two categories based on your holding period:
| Holding Period | Gain Type | Tax Rate |
|---|---|---|
| Less than 12 months | Short-Term Capital Gains (STCG) | 20% flat |
| 12 months or more | Long-Term Capital Gains (LTCG) | 12.5%, on gains above ₹1.25 lakh in a financial year |
Rates shown reflect current rules effective from July 23, 2024. Tax laws change through Union Budgets, so always verify the latest rates before filing.
This exemption applies per financial year across all your equity LTCG combined, not per fund. If your total long-term equity gains in a year are ₹1.8 lakh, only the amount above ₹1.25 lakh — that is, ₹55,000 — is taxed at 12.5%. The first ₹1.25 lakh is tax-free, every single year, regardless of how many equity funds or stocks contributed to it.
Debt fund taxation changed significantly from April 1, 2023. For debt fund units purchased on or after this date, the old LTCG benefit with indexation no longer applies.
Regardless of how long you hold a debt fund purchased after April 1, 2023, the entire gain is added to your income and taxed at your applicable income tax slab rate. There is no separate STCG or LTCG category anymore, and no indexation benefit to adjust the purchase cost for inflation.
This matters because it removes what used to be a major advantage of debt funds over instruments like fixed deposits for long-term holders. Investors in higher tax brackets should factor this into any comparison between debt funds and other fixed-income options.
Hybrid funds follow whichever set of rules matches their actual portfolio composition. A hybrid fund holding 65% or more in domestic equities is taxed exactly like an equity fund — 20% STCG, 12.5% LTCG above ₹1.25 lakh. A hybrid fund with lower equity exposure is taxed like a debt fund — at your slab rate, regardless of holding period. Always check the fund's actual equity allocation in its factsheet, not just its category name, before assuming which tax treatment applies.
If you've opted for the IDCW (Income Distribution cum Capital Withdrawal, formerly called "dividend") option instead of Growth, any payout you receive is added to your total income and taxed at your slab rate. The fund house also deducts TDS at 10% if your IDCW income from a single fund house exceeds ₹5,000 in a financial year. Most investors building long-term wealth prefer the Growth option specifically to avoid this recurring tax event and let gains compound untaxed until redemption.
Since each SIP instalment counts as a separate purchase, a SIP running for several years doesn't have one single "holding period" — it has as many holding periods as instalments. When you redeem a SIP-built holding, most platforms use First-In-First-Out (FIFO), meaning the oldest units are treated as sold first. This can work in your favor: if you redeem after, say, 30 months, the earliest instalments (now well past 12 months) qualify for LTCG treatment, even though the most recent instalments (say, from the last 2-3 months) are still classified as STCG. Understanding this matters especially around the 12-month mark, since redeeming slightly too early can shift a meaningful portion of gains into the higher STCG bracket.
Say an investor sells equity fund units held for 18 months, realizing a gain of ₹2 lakh, and also sells units held for only 8 months from a separate lumpsum investment, realizing a gain of ₹40,000. The 18-month holding qualifies as LTCG: with the ₹1.25 lakh exemption, only ₹75,000 of that ₹2 lakh gets taxed at 12.5%. The 8-month holding is STCG, taxed in full at 20% flat, since STCG has no exemption threshold. Total tax works out to roughly ₹9,375 (12.5% of ₹75,000) plus ₹8,000 (20% of ₹40,000) — around ₹17,375 combined, illustrating how holding period alone, not the size of the gain, determines which rate and exemption apply to each portion.
Key Takeaway: Equity funds get preferential treatment — 20% STCG under 12 months, 12.5% LTCG above 12 months with a ₹1.25 lakh yearly exemption. Debt funds bought after April 1, 2023 lose the indexation benefit entirely and are taxed at your slab rate regardless of holding period. Hybrid funds follow whichever rule matches their actual equity allocation, and IDCW payouts are taxed as income every time you receive them. SIP redemptions can mix STCG and LTCG units in a single transaction, so timing near the 12-month mark matters more than it might seem.
It's per financial year, applied to your total long-term equity capital gains combined across all funds and stocks — not per individual fund.
Units purchased before April 1, 2023 may still follow the earlier rules depending on redemption date and applicable transition provisions — this is worth confirming with a tax professional or your fund house given how specific the cutoff rules are.
Each SIP instalment is treated as a separate purchase with its own holding period, using a First-In-First-Out (FIFO) method when you redeem — so a 3-year-old SIP will have units at different tax stages, not all qualifying for LTCG at once.
Yes, capital losses can generally be set off against capital gains of the same type, and unused losses can typically be carried forward for a limited number of years — the exact rules depend on whether the loss is short-term or long-term.
For resident investors, there's generally no TDS on capital gains from redemption, only on IDCW payouts above ₹5,000. TDS rules differ for NRI investors, who should check the applicable rates separately.
No — tax is triggered only when you actually redeem (sell) your units. Unrealized gains on investments you continue to hold are not taxed or reportable as income.
Yes, especially for SIP investments — since each instalment has its own purchase date, redeeming a multi-year SIP at once can include some units that qualify for LTCG and others still classified as STCG, taxed at their respective rates.
Disclaimer: This article is for general educational purposes only and does not constitute personalized financial, investment, tax, or legal advice. Figures, rates, and rules mentioned may change over time — verify current details with an official source or a qualified professional before making financial decisions.