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What are LTCG & STCG? Understanding Capital Gains on Mutual Funds
A mutual fund is a financial service that collectively draws money from individual investors, who share a common financial goal. Investing in mutual funds can be rewarding, however, you must have a thorough understanding of the different types of schemes and the subtle differences in capital gains. In general, profits that are earned by selling capital assets such as jewellery, land and cryptocurrency are examples of capital gain. Likely, the profits that you make from investments in mutual funds are known as ‘Capital gains ’.
Table of Content
- What is LTCG?
- What is STCG?
- Difference between LTCG and STCG
- Strategies for Minimizing Capital Gains Tax
The burden of tax is inevitable, as capital gains on mutual funds are also taxable under the rules and regulations. Capital gains can be categorised into two such as short-term and long-term. So, before investing in mutual funds, you should clearly understand how your returns will be taxed, as you can also avail tax deductions in certain cases.
There are many factors that determine the taxation on mutual funds, such as fund types, capital gains, dividends and holding period. However, in this blog, we’ll explore the differences between the two types of capital gains.
What is LTCG?
LTCG stands for long-term capital gain. It arises by selling capital assets which have been held for more than a year. The Government of India charges 12.5% on stocks and equity mutual funds held for more than a year, whereas the holding period for debt-oriented mutual funds is over 24 months.
What is STCG?
STCG stands for short-term capital gain. It arises from the sale of capital assets that are held for a year or less. The Government of India charges 20% on equity mutual funds and debt mutual funds. The tax rate for short-term capital gain may vary depending on the type of asset being sold.
Difference between LTCG and STCG
The distinctions between STCG and LTCG lie in their tax rate and treatment. Short-term gains can impact your tax bill. However, long-term gains allow your investments to grow with a lesser tax burden. There are also certain exemptions available on LTCG, making it a key reason why investors choose the long-term holding strategy. Mentioned below is a table with a detailed comparison.
Parameters | Short-term Gains | Long-term Gains |
Equity Mutual Funds’ Holding Period | Qualifies for tax when the holding period is less than or equal to 1 year. | Qualifies for tax when the holding period is more than a year. |
Tax Rate for Equity Mutual Funds | 20% | 12.5% over and above Rs. 1.25 Lakhs. |
Debt Mutual Funds’ Holding Period | Qualifies for tax when the holding period is less than or equal to 36 months. | Qualifies for tax when the holding period is more than 36 months. |
Tax Rate for Debt Mutual Funds | As per the income tax slab rate. | 20% after indexation. |
Strategies for Minimizing Capital Gains Tax
- Hold Your Assets for the Long Term – By holding your investments for more than one year, you can avoid high tax rates, which are prevalent in STCG. This is a simple strategy to minimize taxes.
- Offset Gains – Selling underperforming assets to offset gains is a strategy called tax-loss harvesting. This strategy helps in reducing your overall taxable income.
- Utilize Different Accounts – While investing through retirement accounts such as PPF or NPS can provide tax benefits.
- Exempt Assets – Investing in certain assets, such as equity shares that are held for over one year, may be exempt from LTCG tax up to a certain limit.
Explore More: Equity Linked Schemes | Tax Saving Schemes
Understanding the differences and strategies empowers investors to make informed decisions. By strategically planning your investment horizon, you can maximize returns and minimize the tax burden. Short-term capital gains can provide profits that are quick but are subject to higher tax liabilities. Whereas, long-term gains come with a lesser tax burden. Thus, to choose between these two depends on individuals, their financial goals and their tolerance for the risks involved.
With Muthoot Finance, you have the option to choose from multiple mutual fund schemes and make investments that suit your needs and risks. Always remember that the rewards are always directly proportional to the risk. This means the higher the risk, the higher the returns.
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