In his budget speech today, the Finance minister announced 10% tax (without indexation) for capital gains exceeding one lakh from all direct equity and equity mutual funds. However, all capital gains until Jan 31 2018 will be grandfathered, that is still subject to old rules. Short-term capital gains tax remains at 15%.
Definitions of equity oriented fund as per Finance Bill 2018
Quoted from the memorandum (see below)
In a case where the fund invests in the units of another fund which is traded on a recognized stock exchange,-
(I) A minimum of 90 per cent. of the total proceeds of such funds is invested in the units of such other fund ; and
(II) such other fund also invests a minimum of 90 percent. of its total proceeds in the equity shares of domestic
companies listed on a recognized stock exchange;
b) in any other case, a minimum of 65 per cent. of the total proceeds of such fund is invested in the equity shares of
domestic companies listed on the recognized stock exchange.
Dividend distribution tax on dividend from in an equity oriented fund
Dividends from equity mutual funds will also be subject to 10% tax at source from 1st April 2018.
What should we do now? Invest as if nothing happened! Pay the tax! Taxes and hard work never killed anyone. There is no benefit is selling now and buying again. The government made sure of that. If you sell now, the LTCG will be tax free up to Jan 31st and anway you need to invest again and then pay tax again!!
The long term capital gains until 31st Jan 2018 are free from tax. Only the long term gains made from 1st Feb 2018 will be subject to tax. So existing investors will also benefit from this.
What are the implications of this?
It would be harder to sell mutual funds to senior citizens as they now have other options. Monthly dividend mutual fund sales will take a hit. Also a positive.
As long-term investors, we should be happy to pay the taxes the country needs. I am sure most of you will disagree, but this is a non-event.
While there is a limit of 1L on LTCG, I assume this is a one lakh per financial year.
Reference: Budget 2018-2019 memorandum
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