investguru logo
search
search
+91 9910423232
  +91 9910423232

(9:00 am-5:00 pm, Mon-Sat)
Investguru Experience
4.3 out of 5 stars
(541 Client Reviews)
Impact of Budget 2018 on Equity Mutual Fund Investments
Pawan Agrawal, 19 February 2018
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 had abolished long-term capital gains tax on equities held over a year.

However, as per the Budget 2018, 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 shall 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 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.

As always, your views and feedback on the above are welcome.

Happy Investing!


Pawan Agrawal is the founder and managing partner of Investguru. You may reach him at pawan@investguru.in .



Comments
Biswajeet Panda says :
Feb 21 2018 11:19AM
Can you please give me a example for taxation for growth funds for more clarity?
 



Post Comment (Email ID and Mobile No. will not be displayed in the comment.)
Name
Email
Mobile
Comment


Enter the above code here :
We trust that you will avoid using harsh language and will refrain from making unsubstantiated allegations against individuals and companies. Your constructive feedback and opinions are very valuable to us to serve you and communicate better.
Previous Blogs
Impact of Budget 2018 on Equity Mutual Fund Investments
It is time to educate your Parents
Sensex@32500 : Top 10 Mutual Funds for SIP/STP Investment
Sensex is at all time high. What investors should do now?
Should You Invest Only in Best Performing Mutual Funds?
5 Practices of Highly Successful Mutual Fund Investors
Top 10 Mutual Funds for SIP Investments in 2016
Last One Year - Good for Funds, Not So Good For SIPs
The Best Time to Plan for Your Retirement is Now.
How To Identify A Trustworthy Financial Advisor For Your Investment Planning?
BSE Sensex @ 26425 and correcting. Is it the right time to invest in equity funds?
Are you missing on this dream investment option?
4 reasons why businessmen and entrepreneurs should invest in equity mutual funds
8 Steps to Financial Nirvana for Financial Year 2015-16
Why you should buy personal health insurance even if you are covered by your employer under group policy?
Investment Strategies for lumpsum/one-time investments to generate higher, tax efficient returns
Do not judge your investments only on returns
Will your equity investments yield better returns over short term than long term?
How to double your income from savings account money
Arjuna, Karna or Eklavya? Who you are and who would you want to be?
5 Questions you should ask yourself before investing directly in shares
5 Practices of Highly Successful Mutual Fund Investors
Top 10 Mutual Funds for SIP Investments in 2015
Are you repeating the same mistake with your children?
Top 10 Consistently Performing Equity Mutual Funds
more ››
Expert Views
3 steps to help you overcome investing inertia and put idle money to work
Sometimes it feels we are not doing enough. We had decided to begin that SIP, activate the PPF, invest in that equity share, and i...
A father’s basic financial toolkit
Middle class Indian fathers used to be distant, authoritarian and usually dictatorial. They ran the extended household with an iro...
How to save tax through ELSS Mutual Funds
ELSS Mutual Funds or Equity Linked Saving Schemes offer you a simple way to get tax benefits under Section 80C of The Income Tax A...
more ››
home
Follow us on facebooktwittergoogle plusyoutube
Risk Factor : All investments in mutual funds are subject to market risks and the NAV of the schemes may go up or down depending upon the factors and forces affecting the securities market and there can be no assurance that the fund's objectives will be achieved. Past performance of the Fund does not indicate the future performance of the Schemes of the Fund.
copyright