Be ready to pay LTCG tax of 10 per cent on equity mutual funds

You will not get tax-free returns from equity mutual funds anymore. The finance minister has proposed to tax long term capitals gains of over Rs 1 lakh at 10 per cent without indexation benefit in his budget 2018.

“I propose to tax such long term capital gains exceeding Rs 1 lakh at the rate of 10% without allowing the benefit of any indexation, the finance minister said in his budget speech.

Currently, equity mutual fund investors need not pay any tax on long term capital gains on investments made before a year. If investments in equity mutual funds are sold within a year, gains will be treated as short term capital gains and taxed at 15 per cent.


However, all gains up to January 31, 2018 will be grandfathered, said the finance minister. For example, if an equity share is purchased six months before 31st January, 2018 at Rs 100 and the highest price quoted on 31st January, 2018 in respect of this share is Rs 120, there will be no tax on the gain of Rs 20 if this share is sold after one year from the date of purchase, the finance minister said.

“However, any gain in excess of Rs 20 earned after 31st January, 2018 will be taxed at 10% if this share is sold after 31st July, 2018. The gains from equity shares held up to one year will remain short term capital gain and will continue to be taxed at the rate of 15%,” the finance minister said.

Obviously, this will make a lot investors, especially new investors, rethink about their investments in equity mutual funds. Many investors get into equity mutual funds because of the tax-free returns after a year.

However, taking a decision solely based of the tax proposal could be counterproductive. Investors should remember that they have invested in equity mutual funds because these schemes have the potential to offer higher returns than other asset classes over a long period. This point remains valid even now. Investors don’t have an alternative to equity mutual funds when it comes to investing to achieve long-term financial goals.