How Can You Calculate STCG Tax on Debt Funds?

03 July 2023
8 min read
How Can You Calculate STCG Tax on Debt Funds?

Short Term Capital Gains Tax (STCG) is a tax that is levied on short-term investments. The holding period for short-term investments is less than 36 months, and the tax rate for STCG is 15%. Short-term capital gains tax rates in India are applicable for all types of securities like debt, equity, F&O, and commodities.

STCG Tax on Debt Funds in India is applicable when the debt funds are held for less than 36 months. If the debt funds are held for more than 36 months, it will be considered a long-term investment, and LTCG tax will be levied. STCG can be calculated by subtracting the cost of acquisition from the sale price of the asset.

Mutual Fund Gains

Mutual Funds are a great way to invest your money in India. Mutual Funds are managed by professionals that invest money across a variety of different assets, such as stocks and bonds. The returns generated by mutual funds are distributed to the investors based on their shareholding in the fund. 

There are two forms of returns on mutual funds. The first is the dividend, which is a payout that the fund gives investors regularly, such as annually or semi-annually. Dividends are distributions of earnings to shareholders, and in the case of mutual funds, these distributions come from the fund’s earnings or income.

The second is capital gains, which is what you receive when you sell your mutual funds at a higher price than you bought them for. A capital gain can be either short-term or long-term. Short-term capital gains are made within a year, while long-term gains are made after selling an asset after a year or more. 

Short-Term Tax Gains

There is no tax on gains on mutual funds if they are held for more than three years. However, if you hold these funds for less than three years, then it is considered a short-term capital gain (STCG). The STCG tax rate for mutual funds is 15%, which is also the same rate as the long-term capital gains tax. There is also a 10% surcharge plus an education cess of 3%.

Long-Term Tax Gains

Mutual fund units held for more than three years before being sold or redeemed are called long-term capital gains (LTCG). LTCG in mutual funds attracts lower tax rates at 10%, without indexation benefits, because of the Securities Transaction Tax (STT) paid when first buying into the fund.

Debt Funds

Debt funds are a type of mutual fund that invests in fixed-income securities. Fixed-income securities refer to any investment with a fixed rate of return and a specified maturity date. It includes bonds, debentures, commercial paper, and government securities.

Debt funds are investment funds that primarily invest in fixed-income securities. Unlike equity funds, which invest in stocks, debt funds invest in bonds and money market instruments.

These can be a good option for investors looking to generate regular income and grow their savings. Here are some of the key features of debt mutual funds:

  • Flexibility: Debt funds offer the flexibility of investing in various fixed-income securities with different maturities ranging from a few days to several years. The investment horizon can be customized to suit one’s risk appetite and investment objectives.

  • Capital Preservation: Debt funds allow investors to preserve capital as they do not normally experience sharp fluctuations in value. Capital is preserved as the underlying investments are usually issued by the government or reputed corporate entities.

  • Higher Returns than Bank Deposits: Bank fixed deposits offer interest rates of around 7%. Because debt funds provide exposure to a wide range of securities, they may offer higher returns than bank deposits over the long term.

  • Offer Different Risk Levels: Debt funds invest in a wide range of fixed-income securities including those issued by governments, corporations, banks, non-banking financial companies (NBFCs), and even municipal bodies. Fixed-income securities issued by governments or high credit quality corporations are considered here.

You can look out for some of the best debt mutual funds to invest in if it fits your financial goals.

Tax Implication on Debt Funds

To understand the tax implications in the case of debt funds, let us divide debt funds into two categories:

  • Investments for less than three years;
  • Investments for more than three years

Investments Less Than Three Years

Firstly, for investments for less than three years, the interest income is added to your total income and taxed as per your tax slab.

Let’s understand this with an example. Say your income for FY 19 before adding the interest income on debt instruments is INR 5 lakhs, suppose you earn INR 50,000 as interest in debt funds, the total sum comes out to be INR 5.5 lakhs.

Based on the above table, the total tax is calculated as INR 32,500. Please note that the additional 50,000 income that we had from investing in debt instruments is taxed at 20% as the income is above INR 5 lakhs (The 50,000 interest received can be termed as short term capital gains).

Investments More Than Three Years

In the case of investments made for more than three years, the interest proceeds are taxed at the rate of 20 percent with the benefit of indexation.

Indexation basically adjusts your income payment through a price index. It is done to maintain the purchasing price of the public after inflation, thereby, helping you to lower tax liability.

Let’s take an example to understand this concept.

Say you have invested INR 10,000 in debt funds in FY 2014-15. The value of investment in FY 2017-18 stands at INR 20,000. To arrive at the capital gains as per tax laws, you follow the form:

ICoA = Original cost of acquisition * (CII of year of sale/CII of year of purchase);

Where ICoA is the Indexed Cost of Acquisition; and

CII is the Cost Inflation Index which is brought out by the Finance Ministry every year

So the ICoA in our case will be:-

10,000 * 272/240 = INR 11,333/-

Therefore, the cost of acquisition which was INR 10,000 comes out to be INR 11,333 thereby limiting capital gains from 10,000 (20,000-10,000) to 8,667 (20,000-11,333). Hence we need to pay less tax.

Note: In case you are investing in a dividend plan, surplus is paid out as dividends which is then taxed as dividend distribution tax at an efficient rate of 29.12 percent.

Once this dividend is paid out, the NAV of the fund falls to the extent of the payout. Due to this fall, during times of redemption, the value of the fund might not be the same as the initial investment.

Hence, sometimes capital gains are not prevalent in case of dividend options. They are more applicable in case of growth options wherein the value that is earned gets accumulated and added to the NAV of our fund.

Tax Calculation Of STCG

Short Term Capital Gains are taxed at the slab rate of the person earning them, with a minimum tax rate of 15%. This means that if you fall into the highest tax bracket, your gains will be taxed at 30%, but any other income will be taxed at a lower rate.

If you use those gains to buy a new asset within one year of selling the original asset, your gains will not be taxable. If you use those gains to buy a new asset within two years of selling the original asset, your gains will be taxed at 20%, and if you use them three years after selling the original asset, your gains will be taxed at 10%.

If you have incurred losses on your short-term capital gains, they can be used to offset other short-term capital gains and long-term capital losses in any given financial year.

How Can You Calculate STCG Tax on Debt Funds

The short-term capital gains tax (STCG) is levied on all gains made from selling financial instruments within three years of purchase. The STCG tax rate varies depending on the tax bracket that you fall into and can go as high as 40%.

Even if you are not in the highest tax bracket, you will still be paying a significant amount of taxes. So if you have been planning to sell your debt funds, it’s imperative to understand how they are taxed and calculate your liabilities before making the transaction.

The following guide will help you understand this calculation process and ensure that you don’t end up paying more than required.

Short-term capital gains tax on debt funds refers to the taxes that you pay for selling your debt fund units before three years. The short-term capital gains tax is calculated after adding the amount to your income and then applying the slab rate to your income.

So, if you are in the 20% tax bracket and you have sold your debt fund units which are held for less than three years, then you will have to pay 20% short-term capital gains tax on the profits made from selling these units. The rate of 20% is applicable only if the total amount of gain is over Rs 1 lakh. In case the profit amount is less than Rs 1 lakh, then you will not have to pay any STCG tax on these funds.

For example, we will assume the following:

You bought a debt fund for Rs.10,000 in January.

You sold it after 8 months for Rs.12,000 (i.e. after a gain of Rs.2,000).

The date of sale is August 1st, 2020.

According to the tax laws, if you hold a debt fund for up to 3 years, then you have to pay Short Term Capital Gains (STCG) tax on your profits at the rate of 20%. However, if you hold it for longer than 3 years, then the profits are considered as Long Term Capital Gains (LTCG) and taxed at 10%.


To sum it up, it might be a little complicated for you to calculate STCG tax on debt funds each financial year. Thankfully, some online tools and websites can help you do the calculations for you. These sites will give you the tax liability of your fund while also explaining each step in the process. It pays to be prepared.

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.


The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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