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.
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