In a blow to equity fund investors, the government has proposed to impose long term capital gains tax of 10% on equity funds. However, this tax is applicable only if the capital gains exceed Rs.1 lakh. Also, there will be no indexation benefit given to investors on equity funds.
So far, long term capital gains tax are exempted from equity funds if redeemed after one year.
For existing investors, the government has proposed to grandfather all gains up to January 31, 2018. This means, irrespective of the price you bought the share or units of MFs, the government would consider the highest price quoted on January 31, 2018 as the date of acquisition of shares or units of MFs.
For instance, if your client has invested in an equity fund with NAV of Rs.100 on November 15, 2017 and the price of NAV has grown to Rs.115 on January 31, 2018. Today, if he redeems and NAV as on February 1, 2018 has moved to Rs.117, then your client will have pay tax on Rs.2 instead of Rs.17 as the date of acquisition has changed from the actual date (November 15, 2017) to the grandfathered date (January 31, 2018). Such a concept is prevalent in the sale of house property where fair market value of 2001 is considered for the taxation for the sale of property acquired before 2001.
In his Budget speech, Arun Jaitley, Union Finance Minister, said, “I propose to tax such long term capital gains exceeding Rs.1 lakh at the rate of 10% without allowing the benefit of any indexation. However, all gains up to January 31, 2018 will be grandfathered. For example, if an equity share is purchased six months before January 31, 2018 at Rs.100 and the highest price quoted on January 31, 2018 in respect of this share is Rs.120, there will be no tax on the gain of Rs.20 if this share is sold after one year from the date of purchase. However, any gain in excess of Rs.20 earned after January 31, 2018 will be taxed at 10% if this share is sold after July 31, 2018. The gains from equity share held up to one year will remain short term capital gain and will continue to be taxed at the rate of 15%.”
Sharing the rationale for this move, he said, “With the reforms introduced by the Government and incentives given so far, the equity market has become buoyant. The total amount of exempted capital gains from listed shares and units is around Rs.3.67 lakh crore as per returns filed for A.Y2017-18. Major part of this gain has accrued to corporates and LLPs. This has also created a bias against manufacturing, leading to more business surpluses being invested in financial assets. The return on investment in equity is already quite attractive even without tax exemption. There is therefore a strong case for bringing long term capital gains from listed equities in the tax net. However, recognising the fact that vibrant equity market is essential for economic growth, I propose only a modest change in the present regime.”
Sundeep Sikka, MD and CEO, Reliance Mutual Fund believes that the move will not affect the mutual fund industry. “This is a good news for the MF industry. Retail investors generally do not care about taxation while taking investment decisions. Also, if mutual funds continue to generate alpha, investors would not mind paying some taxes on their investments.”
Also, dividends from equity funds are no longer tax free. The Union Finance Minister Arun Jaitley has proposed to impose a dividend distribution tax of 10% on equity funds. So far, equity funds are exempted from paying dividend distribution tax. Click here to read.
