LTCG Tax is applicable only on equity-oriented mutual funds which hold more than 65% of assets in equities. There is no change in debt fund taxability.
Long-term capital gains (LTCG) tax has been proposed in the Budget on equity-oriented mutual funds, besides gains on equity.
Finance Minister Arun Jaitley has proposed that 10 percent tax will be levied on capital gains in excess of Rs 1 lakh in a financial year on selling one’s investment in the specified instruments.
It has been specified that taxability would arise only if the transfer of such assets occurs after April 1, 2018.
Moreover, capital gains up to January 31, 2018 will be grandfathered, meaning any gains having accrued on an investment up to January 31, 2018, which is sold after 1 April 2018, would be exempt from tax.
The Income Tax Department has clarified that the gains will be computed without providing the benefits of indexation, which links your acquisition price to the cost inflation index.
So, how would the new tax structure impact your mutual fund investments? Well, firstly one has to be clear that it is limited to equity-oriented funds. The budget does not change the tax incidence on debt fundholding.
“Investors have to be clear that LTCG tax is only on equity-oriented funds. As far as debt funds are concerned, there is no change in the taxation structure compared to what is was prior to the Budget. For debt funds, short-term capital gains are taxed as per the individual’s tax slab and the long-term capital gains are taxed at 20% if held for over 3 years and after adjusting for indexation,” S. Sridharan, Head, Financial Planning, Wealthladder Investment Advisors, told Moneycontrol.
Any mutual fund scheme holding more than 65% of assets in equity is classified as equity-oriented scheme.
To understand the exact tax incidence on mutual funds, Moneycontrol asked tax expert Archit Gupta, Founder & CEO of ClearTax.com to explain through an illustration how the tax provisions would work on different types of fund investment in the present regime.
Here is a snapshot by Cleartax explaining the new tax regime on mutual funds:
** For computing the Indexed Cost of Acquisition, the Cost Inflation Index (CII) of FY 2018-19 should be considered. Since the same has not been notified yet, purely for the purpose of the above computation, the CII of 2017-18 has been considered.
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