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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.
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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.
1. Assuming debt funds still get indexation
This benefit was removed for debt fund units bought after April 1, 2023 — a common outdated assumption from older articles and advice.
2. Redeeming just before the 12-month mark
Selling equity fund units at 11 months instead of waiting a few weeks means paying 20% STCG instead of qualifying for the lower 12.5% LTCG rate with an exemption.
3. Choosing IDCW without knowing the tax impact
Regular payouts feel rewarding but are taxed at your slab rate every time — for long-term goals, Growth option is usually more tax-efficient.
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.