Short-Term Capital Gains (STCG) — Rules & Rates
A short-term capital gain arises when mutual fund units are sold within the holding period set by tax law. This lesson covers the period and rate for each group of funds, first-in-first-out matching, SIPs and switches, as of October 2026.
What makes a gain short-term
A capital gain is the sale value of units less what they cost. Tax law then asks how long those units were held. If the holding is within the period set for that group of funds, the gain is short-term; if longer, it is long-term.
The test runs from the date of purchase to the date of sale. The calendar year in which the sale falls plays no part.
The rules for each group
Units of an equity-oriented fund held 12 months or less give short-term gains, taxed at a special rate of 20% under section 196 of the Income-tax Act, 2025 (Section 111A of the old 1961 Act). The rate applies whatever the investor's slab and has applied to sales from 23 July 2024.
For other funds (hybrids between the two tests, gold, silver and international funds) a gain is short-term if units were held 24 months or less, or 12 months or less if listed. These gains are added to income and taxed at the slab rate.
A specified mutual fund holds more than 65% in debt and money-market instruments. Gains on its units bought on or after 1 April 2023 are short-term whatever the holding period, at the slab rate. Surcharge, where it applies, and cess are added to all these base rates.
Which units are sold
When only some units are redeemed, they are taken as sold first-in-first-out: the earliest units bought are treated as redeemed first, and their date and cost decide the holding period and the gain.
Each SIP instalment is a separate purchase with its own date, cost and holding period, so one redemption can contain both long-term and short-term units.
Switches and related points
A switch is a redemption from one scheme and a purchase in another. The redemption leg is taxable like any sale, and the purchase leg starts a new holding period.
Securities transaction tax of 0.001% applies when equity-oriented units are redeemed. Under the new tax regime, the rebate in section 156 (old Section 87A) is not available against capital gains taxed at special rates.
Rules at a glance
A switch within the year (illustrative)
Kavita buys units of an equity-oriented fund on 3 February 2026 and switches them into another scheme on 18 August 2026.
The switch-out is a redemption. The units were held for about six and a half months, so any gain is short-term and taxed at 20%. The units she receives in the second scheme begin a new holding period on 18 August 2026.
A part-redemption matched first-in-first-out (illustrative)
- Assumed figures, for arithmetic only, ignoring stamp duty, exit load and securities transaction tax: an investor buys units of an equity-oriented fund in three lots: 500 units at ₹20 on 10 March 2025, 400 units at ₹25 on 10 September 2025 and 250 units at ₹40 on 10 March 2026.
- On 20 April 2026 the investor redeems 700 units at a NAV of ₹44.
- The first 500 units come from the March 2025 lot, held more than 12 months. Long-term gain = 500 × (₹44 − ₹20) = ₹12,000.
- The next 200 units come from the September 2025 lot, held a little over seven months. Short-term gain = 200 × (₹44 − ₹25) = ₹3,800.
- Tax on the short-term gain = ₹3,800 × 20% = ₹760, before surcharge and cess.
Result. One redemption gives a long-term gain of ₹12,000 and a short-term gain of ₹3,800, on which tax at 20% is ₹760.
Key points
- Equity-oriented units held 12 months or less give short-term gains taxed at 20% (as of October 2026).
- For other funds a gain is short-term if units are held 24 months or less (12 months or less if listed), at the slab rate.
- For specified mutual fund units bought on or after 1 April 2023, every gain is short-term at the slab rate.
- Units are taken as sold first-in-first-out, and each SIP instalment has its own holding period.
Common misunderstandings
- Selling in a later calendar year does not make a gain long-term: only the time between purchase and sale counts.
- Holding a liquid fund for several years does not make the gain long-term: for units bought on or after 1 April 2023 it is short-term at the slab rate.
- A switch between schemes is not tax-neutral: the switch-out is a redemption, and any gain on it is taxable.
Questions people ask
Does the 20% rate depend on the investor's slab?
No. It is a special rate that applies whatever the slab.
How are short-term gains on a gold or international fund taxed?
They are added to the investor's income and taxed at the slab rate.
Which units go first in a part-redemption of a SIP holding?
The earliest instalments, because units are taken as sold first-in-first-out.
What this lesson relies on
- Income-tax Act, 2025 — section 196 (short-term gains on equity-oriented units), the provisions on specified mutual funds, and section 156 (rebate)
- Fund-house tax reckoners for financial year 2026-27 (secondary source for rates, holding periods and securities transaction tax)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.