The ultimate guide to mutual fund tax changes post Budget 2018-19 (yet to be enacted)
Published On: 09-Feb-2018

The long-term capital gains tax (LTCG tax) has made a comeback. Gains from the sale of equity shares and equity mutual funds will now be taxed at 10%, if the total gains in a year exceed Rs. 1 lakh. Long Term Capital Gains from such investments below Rs. 1 lakh will not be taxed.

Let’s illustrate this with an example.

If you’ve made long-term gains of Rs. 1,50,000 in a financial year, commencing from  Financial year 2018-19 , you have to pay LTCG tax only on Rs. 50,000, i.e. Rs. 1,50,000 minus Rs. 1,00,000.

Upto 31st March 2018,, if you sell your listed equity  shares or equity oriented mutual fund units after holding them for more than a year, you didn’t have to pay any LTCG tax.

Gains accrued up to January 31 will be “grandfathered”

The good news in the Budget 2018 proposal, however, is that gains accrued up to January 31, 2018 from such investments have been grandfathered and are exempt from tax, even if they are sold after 31st March 2018.

The Budget proposes that LTCG tax will have to be paid on profit booked after March 31 2018. Put simply, if you sell the listed equity share or unit of equity oriented mutual fund that has been held for more than a year before March 31 2018, you do not have to pay tax. However, if you sell the listed equity share or unit of equity oriented mutual fund stock on or after April 1, LTCG tax will apply on the gains made, subject to grandfathering of the gains upto 31st January 2018.

To understand how LTCG tax is calculated, see the scenarios below:

  • Scenario 1 – An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 250.

As the actual cost of acquisition is less than the fair market value as on 31st of January, 2018, the fair market value of Rs. 200 will be taken as the cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 250 – Rs. 200).

  • Scenario 2 – An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 150.

In this case, the actual cost of acquisition is less than the fair market value as on 31st of January, 2018. However, the sale value is also less than the fair market value as on 31st of January, 2018. Accordingly, the sale value of Rs. 150 will be taken as the cost of acquisition and the long-term capital gain will be NIL (Rs. 150 – Rs. 150).

  • Scenario 3 – An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 50 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 150.

In this case, the fair market value as on 31st of January, 2018 is less than the actual cost of acquisition, and therefore, the actual cost of Rs. 100 will be taken as actual cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 150 – Rs. 100).

  • Scenario 4 – An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 50.

  • In this case, the actual cost of acquisition is less than the fair market value as on 31st January, 2018. The sale value is less than the fair market value as on 31st of January, 2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs. 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be Rs. 50 (Rs. 50 – Rs. 100) in this case.

Securities Transaction Tax (STT) on sale/purchase of listed equity shares will continue. The Securities Transaction Tax (STT) of 0.001% that mutual fund unit holders pay at the time of selling units to the mutual fund, and the STT paid at the time of buying and selling of listed equity shares will remain. STT was introduced by Finance (No.2) Act of 2014 to replace long-term capital gains tax on such investments. Now LTCG and STT will co-exist.

“The LTCG rate is lower as compared to other countries across the globe. Over time, investors will get focussed on the broader India story and not worry too much about LTCG.”, Suraj Kaeley, Group President Sales & Marketing, UTI AMC.

Dividend distribution tax introduced

The Budget 2018 has also introduced a dividend distribution tax (DDT) of 10% for equity oriented funds of mutual funds. This means mutual fund houses will have to pay DDT on dividends declared in respect of equity oriented schemes. While LTCG tax will be applicable for only those investors whose cumulative capital gains in a financial year exceed Rs.1 lakh, DDT will be borne by equity-oriented mutual funds in respect of dividend distributed to all investors.

Tax rates will be increased due to applicable Surcharge & Cess.

Disclaimer 

Source:

An investor education initiative by UTI Mutual Fund.