How-to STP tax Schedule CG

How to handle STP tax in ITR (mutual fund)

From WebNotes, a public knowledge base. Last updated 19 May 2026. Reading time ~4 min.

Key facts

STP treatment	Each installment = switch (deemed redemption + deemed subscription)
Source typically debt	Capital gain at slab rate post FA 2023 (small per installment)
Target typically equity	Fresh cost basis at STP-In NAV; LTCG eligibility from STP date
Schedule CG	Aggregate STP installments per FY

STP tax in ITR requires per-installment capital gain reporting on the source side. Each STP installment is a switch transaction; aggregate FY-wide for Schedule CG. The target side establishes new cost basis for future redemptions.

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Step-by-step procedure

See the procedure infobox above.

STP transaction structure

Each STP installment has two legs (same as switch):

Leg	Effect
STP-Out (source redemption)	Capital gain realised
STP-In (target subscription)	New cost basis established

Both legs together = single STP installment. Tax = source-side gain.

Typical STP scenarios

Source	Target	Source tax	Target future tax
Liquid Fund	Equity Fund	Slab rate (debt-mode)	Per equity rules on future redemption
Short Duration	Equity	Slab rate	Per equity
Equity (reverse STP)	Liquid	LTCG / STCG	Per debt rules

The most common: liquid → equity STP for staggered deployment.

Worked example

Investor sets up 12-month STP from Liquid Fund (cost Rs 12 lakh, current value Rs 12.6 lakh) to Equity Fund. Each month: Rs 1 lakh transferred.

Per installment source gain (approximate):

Liquid fund’s monthly NAV growth: ~0.4% of transferred amount = Rs 400 per installment.
12 installments: aggregate gain ~Rs 4,800.

Schedule CG B1 (Section 50AA): Rs 4,800 at investor’s slab rate.

At 30% slab: ~Rs 1,440 + cess tax.

Target side:

12 monthly equity-fund subscriptions, each with its own cost basis (Rs 1 lakh / STP-In NAV).
Future redemption: each tax lot uses its specific cost.

Comparison with lump-sum

Lump-sum directly into equity (no STP):

No source-side tax (no liquid fund earnings event).
Target cost = lump-sum amount.
Future redemption: capital gain based on single cost.

STP scenario:

Source-side small tax (Rs 1,440 in example).
Target side: smaller cost basis per unit (NAV at STP-In dates rises over time in a rising market).
Future redemption: lower aggregate cost = higher capital gain.

Net: STP adds source-side tax cost but stages entry to reduce timing risk.

Multi-year STP

For STPs spanning multiple FYs:

Each FY’s installments reported in that FY’s ITR.
Aggregate source-side gain per FY.

Tax efficiency of STP from low-yield source

Since source is typically liquid fund (low yield), source-side gains per installment are small. The cumulative annual tax cost is typically Rs 1,000-5,000 for moderate STP sizes. Modest compared to volatility-smoothing benefit.

External references

References

Income Tax Act, 1961, Sections 47, 48, 50AA, 111A, 112A.
AMFI Best Practice Guidelines on STP.
Finance Act, 2023.

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WebNotes Editorial Team

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Last reviewed: 19 May 2026
Conflicts of interest: WebNotes is independent. No relationship with any broker, registrar or bank named in this article.