Why Equity LTCG Tax is not double taxation!

Published on / By M. Pattabiraman Twitter: @pattufreefincal / 15 Comments

Published: February 5, 2018 at 12:30 pm

Last Updated on September 6, 2019

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

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    …. 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!

    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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