Taxation is no more a critical factor in selecting asset class: Rajeev Thakkar, PPFAS

By Rajeev Thakkar

Long term capital gains tax
Before this budget, unfortunately, many a time the taxation of different asset classes were driving investment decisions. Given that both equity and debt will now be subject to tax, investors should take into account their time horizon, risk appetite and profile, diversification needs, goals etc and arrive at an appropriate asset allocation. One should not focus too much on the tax aspects now.

The long-term capital gains tax on debt funds is 20% with inflation indexation benefit. Say a debt fund generates 8% returns and inflation is 5%. The tax will come to about 20% on 3% or 0.6%. This comes to slightly less than 10% of the returns.


Long term capital gains tax on Equity Funds is at 10% without indexation benefits.

In short, taxation ceases to be the critical factor in selecting asset classes.

Given that there is a tax even on long term capital gains, it would be best to keep portfolio churn to the minimum whether in debt investments, debt mutual funds, direct equities or in equity mutual funds.

Purely tax driven products like dividend plans of balanced funds, arbitrage funds etc. may fade away.

Debt Mutual Funds
Given the stressed bank balance sheets and huge funding needs for the infrastructure, the measures of launching Debt ETFs, nudging corporates to move to the debt market and further development of the bond market in India are positive steps and could accelerate the shift from bank deposits to debt mutual funds.

(The author is the CIO and Director of PPFAS Mutual Fund.)