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India\'s 2018 Budget delivered by Finance Minister, Mr. Arun Jaitley proposed return of long-term capital gains tax of 10% on stocks and equity mutual funds exceeding Rs. 1 lakh within a financial year without allowing any benefit of indexation. In 2004, the government abolished long-term capital gains tax on equities held over a year.

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impact of budget 2018 on equity mutual fund

Impact of Budget 2018 on Equity Mutual Fund Investments

Re-Introduction of Long Term Capital Gains Tax

India's 2018 Budget delivered by Finance Minister, Mr. Arun Jaitley proposed

return of long-term capital gains tax of 10% on stocks and equity mutual funds

exceeding Rs. 1 lakh within a financial year without allowing any benefit of

indexation. In 2004, the government abolished long-term capital gains tax on

equities held over a year.

However, as per the Budget, all gains until 31st January, 2018 will be

grandfathered. This implies that you will not be taxed on any gains that you have

already accumulated up until 31st January, 2018. For investors, the fund values

on 31st January 2018 shall become the base value or cost of investment for

calculation of future gains for taxation purpose.

More recently, on 4th February, 2018, the Central Board of Direct Taxes (CBDT)

clarified that the new long term capital gains tax will be applicable only for sales

on or after 1st April, 2018. The long-term capital gains tax exemption will

continue for any sale between 1st February and 31st March, 2018 as per current

taxation policies. To summarize, there is no change in the long term capital gains

tax exemption for the financial year 2017-18.

Introduction of Dividend Distribution Tax in Equity Mutual Funds

The budget 2018 has also proposed levying 10% Dividend Distribution Tax on

dividends distributed by equity oriented mutual funds from 1st April 2018

onwards. The equity-oriented funds comprise diversified equity funds, balanced

funds, equity income funds and arbitrage funds.

This tax shall be paid by the mutual fund from the declared dividend and

subsequently, the dividend shall remain tax free in the hands of the investor.

This shall result in lower dividend payout to the investor. For example, till now,

if the mutual fund declared a dividend of Rs.100/-, entire amount was paid to the

investor without any deduction and this amount received was completely tax

free for the investor. Under the new tax laws, when a fund shall declare a

dividend of Rs.100/-, Rs.10/- shall be paid by the fund as 10% tax to the

government and Rs.90/- shall be paid to the investor as dividend, thus reducing

his dividend income. This dividend of Rs.90/- shall be tax free for the investor.

Returns from Growth and Dividend Option to Vary

Till now, neither the fund nor the investor was levied tax on the dividends.

Hence, the returns of growth and dividend option of a scheme were similar.

From now onwards, the returns from growth option of equity funds Best

investment plan shall be higher than the dividend

Investment Planshall be higher than the dividend option as the dividends shall

be charged 10% tax. The 1 lakh capital gains exemption from tax shall mean that

the investors shall be paying lower tax if they choose growth option over

dividend option.

Our View

Like any tax, coming back of Long Term Capital Gains Tax (LTCG) or Dividend

Distribution Tax (DDT) is negative news for the investors. LTCG or DDT shall

reduce the funds in the hands of investors. Since these taxes are here to stay, we

shall suggest the investors to moderate their returns expectations from equity

investments. Instead of expecting 15-16% returns, they should now target 13-

14% returns from their investments over long term.

Revising Financial Goals

Investors who have planned long-term financial goals will have to revise their

returns expectations. As the rate of return expectations are reduced, a higher

allocation of funds to meet the planned financial goals shall be required.

Less Portfolio Churning

Till now, as the taxation on gains after one year of investment was zero, it was

possible to frequently redeem one fund and invest in another potentially higher

performing fund. But as the tax shall be applicable on gains even after one year

of investment, every sale shall take away some gains from the fund and hence,

the amount left to reinvest shall be lesser than the redeemed fund. This shall

reduce the overall fund value over a period of time. To avoid such costs on every

fund switch, it shall be important to choose consistently performing funds over

cyclical funds so that frequent churning is not required. This shall particularly be

true for high networth investors whose yearly capital gain on churned

investment is more than 1 lakh exemption limit.

Reduction in Monthly Income

Investors who are seeking regular income in form of dividends from mutual

funds should either increase their investments to maintain the current income or

lower their income expectations by 10%. They may be better off by switching

their funds from dividend option to growth option and starting a Systematic

Withdrawal Plan (SWP) for regular income from funds. Through gains made in

growth option, they shall be able to take benefit of 1 lakh exemption from tax.

That means at least on 1 lakh gains made in a year, they will not have to pay 10%

tax which shall result in savings of Rs.10,000 every year.

Conclusion

Let’s accept taxes as they come by and plan our investments accordingly to

minimise their impact on our financial well-being. Switching from dividend to

growth option in funds making higher allocation

growth option in funds, making higher allocation to financial goals, choosing

diversified and consistently performing funds to reduce periodic churn, taking

benefit of 1 lakh exemption in a year are some of the ways by which investors

can reduce taxation and fulfil their goals with peace of mind in the times to come.

If you have any further concern or query regarding your investments or tax

implications, please speak to your financial advisor or write back to

pawan@investguru.in and I shall be happy to reply.

Happy Investing!

Budget 2018 proposal to tax long term capital gains and dividends in equity

investments is negative news for the investors. The good news is that all the

capital gains made till 31st January 2018 shall be exempt from Tax. Read on to

know the impact of new taxes on your investments and how to minimise it.