The Finance Minister, on 1st February, in his budget speech announced that long-term capital gains tax which arises out of the sale of equity oriented Mutual funds schemes as well as direct equity shares, will now onwards be taxed at the rate of 10% if the cumulative capital gain exceeds INR 1 lakh in a financial year. However, if such long-term capital gains are less than INR 1 lakh, then such a person is exempted from paying the tax.
The scenario up to Financial Year 2017, prior to the budget speech, was that no tax could be incurred out of the sale of equity mutual funds and direct equity shares if such units or shares have been held by the Assessee for at least one year. However, the threshold for long-term capital gains will continue to remain to be 1 year.
The Securities Transaction Tax paid by the unitholders of mutual funds at the time of selling and while buying and selling of direct equity shares will remain in force.
In this proposal, the Finance Minister has allowed exemption of gains that would have arisen up until January 31, 2018. only gains arising after 31st of January will be considered.
The Budget 2018 has also introduced a dividend distribution tax of 10% for mutual funds, to ensure that investors don’t switch to dividend plans, in order to escape paying the new 10% capital gains tax, This is a tax what a fund house pays—from the distributable surplus—before it pays the dividend. Anyhow, while the 10% capital gains tax is meant for only those investors whose cumulative capital gains are in excess of INR 1 lakh, the DDT will be borne by all investors of equity-oriented mutual funds.
But is it fair to make equity funds taxable? While stock market investors became rich due to their equity shareholdings, they continued to not pay tax. It is time some tax parity was brought about, though equities still should be a part of an investor’s portfolio as part of asset allocation.
Shyam Sunder, managing director, PeakAlpha Investment Services Pvt. Ltd says that a 10% long-term capital gains tax rate may induce some investors to churn before a year is over. “The short-term capital gains tax is 15%. Now, there is this LTCG of 10%. So within a year, if an investor has made sizeable gains, she could think of selling her gains and booking her profits by paying 15% taxes and then perhaps re-entering the markets later. She might think that instead of waiting for a year and paying 10% LTCG, she may as well sell now and pay 15% STCG and exit.”