Why Equity LTCG Tax is not double taxation!

Published: February 5, 2018 at 12:30 pm

Last Updated on

I am surprised at how many people assume that the 10% Equity LTCG tax introduced in Budget 2018 also applies to mutual funds. That is, they think that the Equity LTCG tax is a form of double taxation -the fund houses pay tax once and we tax again when we redeem. This is NOT true! A look at why the Equity LTCG tax is not a double-tax.

According to Section 115UA of the income tax act (search for 115UA)

…. any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust

According to section 115UB of the income tax act

…. any income accruing or arising to, or received by, a person, being a unitholder of an investment fund, out of investments made in the investment fund, shall be chargeable to income-tax in the same manner as if it were the income accruing or arising to, or received by, such person had the investments made by the investment fund been made directly by him.

The income paid or credited by the investment fund shall be deemed to be of the same nature and in the same proportion in the hands of the person referred to in sub-section (1) (above), as if it had been received by, or had accrued or arisen to, the investment fund during the previous year subject to the provisions of sub-section (2).

What does this mean?

This means that the mutual fund houses will simply pass on the total income to us (when we redeem) without any deduction of capital gains tax. This is known as pass-through income. We have to pay the tax as if we made the investment ourselves. The funds will only report the income distributed to the taxman.

Therefore, there is no question of double taxation!  Relax and pay the tax! Or crib and pay the tax. It is all the same.

It is amazing that practically no one asked if fund houses pay STCG tax before Feb 1st. Now many incorrectly assumed that the Equity LTCG tax is double taxation!

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Are we investing in equity because LTCG tax was zero? Or are we investing to fight inflation and change the way our family looks at and handle money?

Is STT + LTCG 10% not a double tax?

I am not interested in offering opinions. I deal with facts. Double taxation means taxing the same amount twice for the same reason. If the AMCs also had to pay LTCG tax, it would be double taxation.

The securities transactions tax is a tax on transactions in the securities market. Whether you book a loss or a gain this tax will apply. This is different from capital gains tax. Just because STT was introduced in 2004 and LTCG tax was removed does not mean they cannot or should not co-exist.

LTCG and STT are different taxes applicable to the same amount and therefore not double taxation.

If you wish to read more about the STT, refer to this

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15 Comments

  1. Thanks a lot ! This meant much to us all. I never asked for STCG by MFs as stcg does not carry indexation benefit. Selling shares by MFs to pay dividend was my concern of Double Taxation.

    1. There too there is no double tax. However, from April 1st all dividends will have 10% DDT tax at source.

  2. I have LTCL – long term cap loss accumulated from yesteryears. These were from the era when FMPs used to give 10% and I had pseudo losses due to double indexation , due to the 1 year rule prevailing then (that too was jettisoned by Jaitley in his 1st budget to 3 years and these indexation benefits were substantial, before the era when govt started ‘managing’ the CPI index too),all are pseudo losses and sitting in return and the 8 year carry forward will help
    Question is- can I use this LTCL to set off this LTCG from equity and equity MFs?

  3. Sir,
    Just for simplicity,
    I if redeem some of units for which gain is above 1lac, then , people around are saying that, mf house will deduct the 10%tax itself and we have to do nothing….
    Means nav will get adjusted by mf house.
    Is it true?

  4. yes it is double taxation.This is because capital gains on equities must take into account that the underlying business has already paid corporate tax .This was the basis on which kelkar commitee recommended the abolition of capital gains on equities in 2004

  5. Hello professor,
    What is your take on DDT? Some people argue that this is double taxation because the profit of the company already is taxed. So why tax it again for simply splitting it among the owners i.e., share holders? But as you said, there is no point in cribbing about it. But still would like to hear your thoughts on it.
    Regards
    Sagar

  6. Hi Pattu sir, thanks for the LTCG insight.
    * What is the implications of LTCG on NRIs who is investing via NRE accounts ?
    * To avoid(or reduce) LTCG there is a suggestion of yearly “sell off” and “buy back” on same day – How does it work for MF Units ?
    Say if MF units are bought via monthly SIP and when we sell off, the MF units bought first will be sold ? or the MF Units bought last ? (i.e First In First Out or Last In First Out ).
    * If possible, can you please publish an article on how LTCG will be calculated on MF with SIP option and how do we reduce LTCG as many will be benefited.
    Thanks.

  7. Hello Pattu,

    I sell the mutual fund units in equity and invest in debt funds whenever my asset allocation disturbs. i have Done it when modi gov. comes in power, done prior to budget declaration in 2018.
    My query is that I file the ITR however I did not report this transaction in that , weather its illegal or what.

  8. NOW Whenever MF desposes any script , it will have to pay either LTCG or STCG tax . It was presumed that better MFs will not go for more STCGs. And when I sellout this MF , any time, I have to pay LTCG or STCG tax , isn’t this case is of double taxation? isnt it prudent now to opt for equity market directly than paying min 24% tax on profit in MF , by taking little extra efforts, what u suggest ?

  9. 1. Your article is misleading. When an AMC buys and sells scripts it will now pay both STCG and LTCG for the scrips it buys and sells. So if a fund house buys a script and sells it after 2 years it would pay LTCG on this scrip from now on.
    2. These taxes plus other transaction and brokerage costs are adjusted in the NAV so this is invisible to the user.
    3. But when the investor redeem their units say after 2 years, They would still have to pay LTCG again, when the underlying NAV has already suffered a LTCG. That is double taxation.
    4. Earlier STCG was double taxed, now LTCG is also double taxed. If you still think it is not double taxation i would like to hear which point of the above you disagree and why.

    1. Seriously! I quote the income tax act to show there is no double tax and you claim the amc pays CG tax! If you want me to take you seriously provide proof! Costs are expenses are different and not tax. The amc does not pay any tax and the law is clear on that.

  10. Fund houses pay STT on sale price of shares sold. The sale price includes gain on which the investor pays STCG or LTCG tax. So, there is a small amount on which both STT and STCG/LTCG are charged. However, that should not influence our investment decisions. Please correct me if I am wrong.

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