Budget 2018 has re-introduced the long-term capital gain tax on equity shares and equity mutual funds. Almost all financial blogs and portals has published at least one article on this topic (including relakhs.com).
This Budget 2018 LTCG Tax proposal will be implemented from 01-April-2018.
In this post, I am not going to discuss about the pros & cons of levying tax on your Equity investments. As it is going to be a rule and we need to abide to it, if making investments in Equity mutual funds / stocks.
So, let me list out the possible implications of this LTCG tax proposal and some of the important factors that you, as a mutual fund investor, have to to keep in mind….
Budget 2018 LTCG Tax on Equity Mutual Funds & Important Implications
Investments in Arbitrage Funds
- I have been suggesting Arbitrage funds to my blog readers as one of the savings option for building an Emergency fund(EF). These funds are similar to say a Liquid Debt Fund in terms of Returns and is like an Equity fund with respect to Tax implications.
- As per the current tax laws, the LTCG on equity funds are tax-exempt. So, same is the case with Arbitrage funds.
- However, if the new LTCG tax proposal gets implemented, the returns on Arbitrage funds are also subject to 10% LTCG tax.
- Normally the returns on Arbitrage funds can be in the range of 5 to 7% pa. Thanks to 10% tax, we have to expect a much a lower returns range henceforth. So, kindly keep this in mind.
- The LTCG (minimum one year holding period) on Arbitrage funds will fall under 10% tax slab without indexation. The Liquid Debt funds (another savings option for EF) falls under 20% tax slab (3 year holding period) with indexation.
Switching to Direct Funds?
- There is no doubt that the returns from Direct mutual funds are higher than Regular plans of MF schemes.
- In case, you have been planning for the switch, do watch out for tax implications on LTCG, as switching from a regular plan to direct plan are considered as normal redemption.
- Kindly note that I am not discouraging the readers not to switch to direct plans, but you just have to exercise greater care in switching from regular plan to direct plan of equity mutual fund schemes. (Related Article : ‘Switching to Direct Mutual Funds From Regular MFs? Keep in mind these handy tips!‘)
- There can be different reasons for portfolio re-balancing. One such scenario can be – Let’s assume that your investment strategy is like to stick to 60:40 Equity to Debt investments ratio. If Equity markets perform well and the value of your Equity portfolio increases significantly then you may go for a portfolio re-balancing to make the ratio re-set to 60:40. So, for this you may have to book the profits and realize some LTCG. In this case, do watch out for 10% taxation. (Read : ‘What is Portfolio Tracking and Why Should I do it?‘)
Dividend Option of MF Schemes
- The dividend received in the hands of unit holder for an equity mutual fund is completely tax free. The dividend is also tax free to the mutual fund house.
- Budget 2018 has however proposed 10% tax on Dividend distribution on Equity oriented (Dividend option) units (payable by the Fundhouses). Also, note that as per Budget 2016, income by way of dividend in excess of Rs 10 lakh is also chargeable at the rate of 10%
- You will now roughly get 10 % less dividend as compared to what you were getting earlier.
- In case, you have opted for dividend plan and are highly dependent on it as a source of income (passive/primary), have to factor-in lower dividend payout henceforth and you may have to look out for other options to fill this income-gap.
- Dividend option in MF schemes can a bad idea now.
Long Term Capital Losses & Set off
- Below table has the details on capital loss set-off rules on sale of Stocks, Equity Mutual Fund Schemes.
- Now that the long-term capital gain on sale of equity funds and listed shares is going to be taxable, you can expect long-term capital losses on the sale of equity shares or equity mutual fund units to set off capital gains.
- As setting off LTCL is going to be possible, may be this FY end is the right time to analyze your Equity portfolio performance and can do some re-jig, if required. You can come out of non-performing ones and book loses against LTCG (if you have any).
- The 10% tax will take away certain gains from your hand, so you need re-work your corpus requirements and try increasing your investment allocation (like SIP amount) for your financial goals. Do maintain realistic return expectations from Equity oriented plans. If you have been assuming say 12% from equities in all your calculations, it is now advisable to assume say 10% from Equity funds. Also, give higher priority to proper Asset Allocation.
Budget 2018 LTCG 10% tax proposal is a classic example that nothing remains constant. Who knows, the next budget may totally scrap this 10% LTCG tax (or) may even increase it to 20%?? There is absolutely no guarantee!
Life has to move on! So, let’s continue investments in Equity mutual funds and/or stocks for now, because, ‘the Best Post Tax instrument is still Equity’ for long-term Financial goals.
You may kindly add any other possible implications on the implementation of LTCG Tax (Budget 2018) proposal in the below comments section. Thank you!
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)
(Post published on : 05-February-2018)