Long Term Capital Gains Tax on Mutual Funds

Capital Gains Tax should come as no surprise; PM Narendra Modi had made it fairly evident in his December, 2016 speech, at the inauguration of National Institute of Securities Markets he said,

“Those who profit from financial markets must make a fair contribution to nation-building through taxes. For various reasons, the contribution of tax from those who make money on the markets has been low. To some extent, the low contribution of taxes may also be because of the structure of our tax laws. Low or zero tax rate is given to certain types of financial income. I call upon you to think about the contribution of market participants to the exchequer. We should consider methods for increasing it in a fair, efficient and transparent way.”

PM minced no words and since STCG’s (Short-Term Capital Gains) were already taxed at 15% it was only a matter of time for LTCG’s (Long-Term Capital Gains weren’t taxed since 2004!) The “Listed” Stocks sold less than 12 months are considered Short-Term Capital and the same sold over 12 months become Long-Term Capital.

Long Term Capital Gain tax on Equity Mutual Funds has also been introduced; however, equities still remain the lowest taxed investment vehicle. Equities and SIP’s (Systematic Investment Plans) have increasingly found favour amongst retail investors, so they are unlikely to be affected by Long Term Capital Gain tax. With Interest rates decreasing, equity mutual fund schemes are still attractive for investors providing better returns over a longer period.

The Changes in 2018 Budget for Long Term Capital Gains (LTCG):-

• Any Equity based Mutual Fund Scheme sold after a year from the Date of Purchase will be taxed at 10% on profits. No Indexation benefit i.e. Cost revision due to Inflation is applicable
• Upto 1 Lakh on profits is exempted from Tax
• Price of Investment’s (LTCG) booked for the successive financial year (starting from April, 2018) will be adjusted to 31st January, 2018 for Tax Liability Calculation.
• These are only applicable on profits.

Dividend Distribution Tax on Equity Mutual Funds

Union Budget 2018-19 requires Mutual Fund Houses be taxed at 10% for dividends declared under equity schemes. This Dividend Distribution Tax (DDT) is for Equity Mutual Funds. DDT for Debt Mutual Funds stands at 25%.

So, Dividend pay-outs and profits (Capital gains over 1 Lakh) for equity funds taxed at 10%.

Opinion: An Investor aims to create wealth. Receiving dividends means missing out on gains received through CAGR (Compound annualized Growth Returns) over a period of 3 or 5 years. Don’t cash out, stay invested for a minimum of 3 or 5 years and see money turn to wealth.