The number of people investing in the stock market and mutual funds is steadily rising. Everyone wants to earn handsome profits by investing their savings in equity schemes. However, are you aware that a significant portion of your profit could be deducted as tax? If you are planning to sell shares or equity mutual fund schemes, it is crucial to understand the rules regarding Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) taxes. Selling in haste without knowing these rules can significantly reduce the 'real return' on your hard-earned money.

Why investors are flocking to mutual funds
Equity mutual funds have become the top choice for retail investors these days. Those who are intimidated by the volatility of the direct stock market often opt for the safer route of mutual funds. Through these schemes, investors' money is still invested in companies listed on the stock market. While the stock market offers excellent returns, the actual earnings decrease due to taxes when you sell your units to realize those profits.

The profit calculation depends on timing
Before booking profits, you must consider how long you have held the investment. The actual return from any asset depends on the amount of money you receive in hand after tax deductions. Tax rules hinge entirely on the duration for which you have held the shares or mutual fund units in your portfolio. In market terminology, this is known as the 'holding period.' It is this period that determines whether Short-Term Tax or Long-Term Tax applies to you.

Heavy impact of selling before one year
If you purchase shares of a company or mutual fund units and sell them before completing 12 months, the profit earned is subject to Short-Term Capital Gains (STCG) tax. Under current regulations, this tax is levied at a rate of 20 percent. Let us understand this with a simple example. Suppose you bought some shares and sold them within a year, earning a profit of ₹1,000. A tax of 20%—amounting to ₹200—would apply to this ₹1,000. Consequently, your actual profit would be reduced to just ₹800.

**Significant relief on long-term investments**
However, if you hold the investment for 12 months before selling, it falls under the Long-Term Capital Gains (LTCG) tax category. For long-term investments, the tax rate drops to 12.5%. This means you would pay only ₹125 in tax on that same ₹1,000 profit, leaving you with ₹875.

Additionally, there is a major benefit for investors: under income tax rules, long-term capital gains of up to ₹1.25 lakh in a financial year are completely tax-free. If you sell your shares or mutual funds after a year and your total annual profit is ₹1.25 lakh or less, you will not have to pay a single rupee in tax to the government.

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