In budget 2018-19 two new taxes have been introduced on equity mutual funds, you might be awestruck by what will it cost you.
Budget 2018 on 1st Feb announced by the finance minister of India states that there will be two new taxes on mutual funds.
The reaction of budget 2018 on Nifty was it went down around 2.33%.
LTCG (long-term capital gain) of equity mutual funds crossing the limit of ₹1 Lakh will be taxable by 10%. This tax will be without any benefits. There also be a 10% DDT on dividends scattered by the AMC.
How will LTCG be Calculated Now?
The profits of investing in equity mutual funds that arise after keeping your money invested in mutual funds are known as long-term capital gains (LTCG). The long-term capital gain of this mutual fund now will be taxed at the exact rate of 10% without any tax benefits if the amount of the profits cross the limit of ₹1 Lakh in a year.
If the long-term capital gain is less than ₹1 Lakh the amount will not be taxable.
According to the new tax rule funds like balanced and arbitrage funds also be taxable. The STCG (short-term capital gain) will be taxed at the old rate of 15%.
How about ELSS Tax Saving Funds?
Equity-linked savings schemes or ELSS all were allowed for a tax deduction. Now the ELSS will also be taxable because of equity funds according to new tax rules.
You May Like to Read: Top 5 Reasons why you should Invest in ELSS
The Grand Father Clause Gives Some Alleviation
The FM (Finance Minister) has given a chance to investors who were already on profits by adding the grandfather clause. According to this clause LTCG bought earlier and the sale of units will allow tax deduction.
This means any investors who keep investing and later sell their equity funds will be allowed a tax deduction. An amount that crosses the limit of ₹1 Lakh will be charged as tax 10%.
Applicable Tax on LTCG
For example, take you have invested around ₹5 Lakhs as of 1st Jan 2017 then you amount which will be gained at the end when you sell your mutual funds will be taxable.
A Dividend Distribution Tax (DDT) of 10% has been Imposed
Each and every equity mutual fund investment will be charged at 10% of DDT, In fact, the amount received by dividends by investors allowed tax exemption, and the fund house or AMC will have to pay TDS at 10% to the govt.
The dividend distribution will be lower and it will decrease the cash surplus present for distribution due to 10% DDT.
Due to dividend choice being less cost-effective, anyhow whenever you are looking for dividends the perfect investments are liability mutual fund investments because they are less capricious and more balanced.
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What it will Cost the New Tax to the Investors
Tax benefits on long-term investments for equity mutual funds were one of the best options along with good returns. This was the main attraction to the investors. This new budget is a little bit disappointing.
Nevertheless, the new tax is not a big problem for new and old investors if investments are for the long term, and investors should not worry about this news.
All the equity mutual fund investments have been able to produce an average CAGR of 15%-20% in the past and the effect of a 10% tax will be it can come down up to 13.5%-18% which is much higher than any other assets deliver the returns.
By taking high post-tax returns into consideration, easy liquidity, and various options provided, we strongly recommend a logical percentage of equity funds to keep in your mutual fund investment goals.
The Bottom Line!
Investors should not worry because of a new tax on equity mutual funds they should continue to mutual fund investments to stick with their financial goals.
New taxation will boost the country’s economy which will be beneficial for the future that’s why an investor should be free from worrying about new taxation because mutual funds still generate higher returns compared to any other asset class.