Tax saving, safe and convenient- these were the ace reasons that cheered the immense acceptance mutual funds gained in the Indian market.
The new alternative had everything the mid-income segment investors were looking for.
They were relatively safer in the ultra-volatile stock market place and served as an avenue letting the lesser jacks of the stock market make some quick bucks.
In the 2018 budget the center restructured the taxation policy administering the mutual fund market and the beneficiaries of the long-term capital gains will have to pay up taxes to the tune of 10% or above for gains above Rs 1 lakh.
Several questions have been plaguing the investors in the aftermath of the decision. Is there a change in the rules bringing long-term gains from equity mutual funds again under the tax net? When will this become effective and how do you calculate the gain and the tax are some of them.
Mutual funds are among the most popular routes to invest in equities for those who don't want to buy shares on the market.
Equity mutual funds
Mutual funds invest in equities and bonds. In India, funds that put more than 65% of the corpus in the shares of companies are classified as equity mutual funds.
Gains or profits on securities held for at least for 12 months are termed long-term capital gains — long-term capital loss in case the returns are in negative. Rest are called short-term capital gains, or loss.
Tax implications on gains
Long-term gains from listed equity mutual funds are tax-free until March 31, 2018. To avail the benefit, the fund units should be sold through authorized stock exchanges, paying securities transaction tax (STT).
Finance minister Arun Jaitley has scrapped the tax-free treatment of long-term gains in his latest budget.
On short-term capital gains, the tax rate is 15% and it remains unchanged.
Calculating long-term capital gains tax
Tax is applicable on long-term gains beyond Rs 1 lakh from all listed mutual fund units sold during a year. The budget has proposed a 10% tax on the amount that exceeds the Rs 1 lakh cutoff, if the gain is Rs 1.5 lakh, tax will be applicable only on Rs 50,000. The rule is effective from the fiscal year 2018-19.
Here too, the units must be sold through authorized stock exchanges after paying the STT.
No tax until end-March
Long-term capital gains on equity mutual funds will remain tax free through this fiscal year, that is until March 31. On mutual fund units bought before 2018 February 1 (the day when the budget was presented), tax will be applicable only on the gains from that date.
A beneficial provision has been built into the rule to calculate the fair price of fund units bought before February 1: the unit holder could pick the higher of the actual purchase price or the market value as on 2018 January 31. The higher price will allow the investor to show a smaller gain and therefore pay a lower tax. If there was no trading on January 31, the market value will be the highest price quoted on the previous trading day. If the units are not listed on a stock exchange, the net asset value as of 2018 January 31 should be taken into account.
When units are sold outside exchanges
Tax at 20% must be paid on the long-term gains from mutual fund units redeemed outside authorized stock exchanges without paying SST.
However, while calculating the gains, the purchase price of the units could be adjusted for inflation. If this benefit is not availed of, the tax rate will be 10%.