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Capital Gain Tax

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Should LTCG Tax bother your Mutual Fund investments?

Till the financial year 2017-18, the long term capital gains on sale of equity shares and equity oriented mutual funds were exempt from tax. However, the Union Budget 2018 proposed to introduce LTCG tax on equity investments in shares and mutual funds @ 10% from 1st April 2018. As such, it has been seen as a negative as the tax rate has increased from 0% to 10%. However, knowing this fact plainly may do more harm to your long term investment strategy. This article aims to help you understand the impact of this tax on your money management.

Let us first know the exact provisions in respect of this tax on your mutual fund investments:

Equity Oriented Mutual Funds – Long term gains from redemption of investments in equity oriented mutual funds are to be taxed at 10% without any indexation benefit w.e.f. 1st April 2018. However, with an intent to protect the investors with small gains, long term gains upto Rs. 1 lakh in a year have still been kept out of tax net. Also, any gains accrued on your existing investments till 31st January 2018 will also stay exempt from the new tax. So, if you invested Rs. 1 lakh in equity oriented mutual funds on 15th January 2017 and the market value of this investment became Rs. 2.75 lakh on 31st January 2018. So, just , in case you redeem the investment for Rs. 4.20 lakh on 15th December 2018, the gains till 31st January 2018 i.e. Rs. 1.75 lakh will still be exempt and LTCG tax will be applicable only on gains thereafter i.e. on Rs. 1.45 lakhs (Rs. 4.20 lakh minus Rs. 2.75 lakh).
Non-Equity Oriented Mutual Funds – There has been no change in the taxation for such MF schemes. Accordingly, the long term capital gains on such schemes will be taxed at 20% of gains with indexation benefit.

The investment decisions are taken by the professional fund managers on the basis of prevailing macroeconomic conditions, company’s performance, and general economic outlook. The investors must also note that the 10% tax as levied on long term gains from equity MF investments is still among the lowest rates for taxing the returns from various investments including fixed deposits etc. Hence, it does not make sense to ignore mutual funds as investments, simply because of imposition of LTCG Tax.

Mutual funds provide you with a potential of higher returns, as also being reflected by the historical data. If you would have invested Rs. 1 lakh S&P BSE Sensex in April 1979, your investments would be valued Rs. 3.64 crores as on 19th July 2018, a spectacular returns of 364x in just around 39 years. As such, you must continue to stay invested in mutual funds to stay on the path of wealth creation and don’t let this LTCG tax impact your decision to invest in mutual funds to achieve your financial goals.

Edelweiss Partners offers you an online mutual fund platform that offers a comprehensive bouquet of Mutual Fund schemes across categories and fund houses. It also provides access to the online transaction platform, research reports, expert analysis, fund recommendations, and financial planning tools.