Understanding the Difference Between Long-Term and Short-Term Capital Gains in Mutual Funds

For many investors, mutual funds are a popular choice due to their potential for growth and diversification. However, one aspect that often confuses people is the tax implications associated with the gains from these investments. Specifically, understanding the difference between Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) is crucial for effective financial planning. This article will clarify these concepts and explain the recent changes in tax rates as introduced in Budget 2024.

What Are Capital Gains?

Before diving into the differences, it's important to understand what capital gains are. Capital gains refer to the profit you make when you sell your mutual fund units at a price higher than the purchase price. Depending on the holding period—the length of time you keep the investment before selling—these gains are categorized as either short-term or long-term. If you wish to make the best mutual fund investments in Kolkata, reach out to experts.

Short-Term Capital Gains (STCG)

Definition: Short-Term Capital Gains are realized when you sell your mutual fund units after holding them for a short period, generally less than 12 months. This rule applies to equity-oriented mutual funds, which primarily invest in stocks.

Taxation: STCG on equity mutual funds is taxed at a flat rate. Before Budget 2024, this tax rate was 15%. However, the recent changes have increased the rate to 20%. This means that if you sell your mutual fund units within a year of purchasing them, the profit you earn will be subject to a 20% tax.

Long-Term Capital Gains (LTCG)

Definition: Long-Term Capital Gains are realized when you sell your mutual fund units after holding them for more than 12 months. This applies to equity-oriented mutual funds as well as certain other types of funds.

Taxation: LTCG was previously tax-free up to ₹1 lakh per year, with gains above this threshold taxed at 10%. However, Budget 2024 has made significant changes. The exemption limit has been raised to ₹1.25 lakh per year, but the tax rate on gains above this limit has increased from 10% to 12.5%.

Key Differences: STCG and LTCG

• Holding Period: The primary difference is the holding period. STCG applies to investments held for less than 12 months, while LTCG applies to investments held for more than 12 months.

• Tax Rate: STCG is taxed at a higher rate (20% post-Budget 2024) compared to LTCG (12.5% for gains above ₹1.25 lakh).

• Tax-Free Threshold: LTCG offers a tax-free threshold, which has been increased to ₹1.25 lakh per year. STCG does not offer any such exemption.

Conclusion

Understanding the difference between STCG and LTCG is essential to select the best mutual fund to invest in Kolkata. It is important to keep updated on the changes in taxes so that you always plan investments accordingly.