Impact of LTCG tax on your MF Investments

Tuesday, 25 February 2020


Impact of LTCG tax on your MF Investments

Pallav Bagaria | March 03, 2018 12:07 hrs

The Union Budget 2018 has proposed to introduce LTCG tax on equity investments in shares and mutual funds @ 10% from 1st April 2018. However, Government has taken due care to introduce this tax in a non-disruptive manner so that any gains until 31st January 2018 will continue to stay out of the tax net. Here is how Budget 2018 has impacted your investments in Mutual Funds:

  1. Equity Oriented Mutual Funds – The long term gains from investments in equity oriented mutual funds were exempt from tax till financial year 2017-18. However, the Budget has proposed a 10% tax on such long term gains without indexation benefit, commonly referred to as LTCG tax, on such gains from 1st April 2018. However, to protect investors with small gains, long term gains up to Rs 1 lakh in a year will continue to stay exempt. Further, any gains accrued on your existing investments till 31st January 2018 will also stay exempt from the new tax. For e.g. an investment of Rs 1 lakh made on 15th January 2017 had become Rs 2.50 lakh on 31st January 2018. Further, in case you redeem the investment for Rs 3.75 lakh on 15th April 2018, the gains till 31st January 2018 i.e. Rs 50 lakh will be exempt and LTCG tax will be applicable only on gains thereafter i.e. on Rs 1.25 lakhs (Rs 3.75 lakh minus Rs 2.50 lakh).
  2. Mutual Funds other than Equity Oriented Schemes – Budget has not brought any change in respect to taxation of such schemes. So, the long term capital gains on such schemes continue to stay taxable at 20% of gains with indexation benefit or 10% of gains without indexation benefit whichever stands beneficial to the investor.

So, while exempt income is always considered better than a taxable income, investors must also note that the 10% tax as levied on long term gains from equity MF investments is still one of the lowest tax rates for investments in various asset classes including fixed deposits etc. Hence, just for this tax, you must not leave any opportunity to invest in equity markets to make handsome returns as indicated through historical data. Rs 1 lakh invested in BSE Sensex in April 1979 would have turned into Rs 3.40 crores as on 31st January 2018, an astonishing 339-times return in just 38 years. As such, long term investing indeed makes sense for a wealthy financial future.

In fact, LTCG tax on equity shares and equity oriented mutual funds has made investing in Mutual Funds more beneficial. You now have one more reason to invest in equity markets through mutual funds instead of equity shares. This is because each time you book profits from your investments in shares, you are now liable for LTCG tax @ 10%. However, in case of mutual funds, you are liable for tax only when you redeem your MF investments and not when your fund manager books gains from the portfolio investments. The fund manager takes the investment decisions on the basis of prevailing market conditions, company’s growth projections, business and economic outlook. So, while you get benefited by the gains realised by the fund manager though increase in NAV of the fund, you pay tax only once you redeem the investments.

As such, you must continue to stay on the path of wealth creation and don’t let this LTCG tax deter you from investing in mutual funds to achieve your life goals.

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