ET in the classroom: Impact of LTCG on mutual funds

1. What is the budget proposal on LTCG (Long term capital gains) for equity oriented mutual fund schemes?

A: Till now investors who invested in equity mutual funds and sold them after holding them for more than a year paid zero LTCG. In this years budget, the government has proposed a 10% LTCG tax on gains made above Rs 1 lakh per annum.

2. The budget talks about grandfathering in LTCG What does that mean?


A: The grandfathering clause is the exemption granted to existing investors for gains made by them before the new tax law comes into force. The government has done this to ensure that investors who have committed money keeping in mind the easier tax regime are protected. As per the new laws, the government has said that gains made in equity oriented mutual fund schemes till January 31, will be grandfathered or exempted. There will be no LTCG tax on notional profits on mutual funds till then.

3. Who will come under the new LTCG tax net? When is the tax payable?

A: Since this is a direct tax proposal it will normally be applicable for the assessment year 2019-20 (Financial Year 2018-19). In other words, the LT Capital gains, of over Rs 1 Lakh, made for the year 2018-19 will be liable to tax at 10%.

4.What happens to my tax liability if I sell equity oriented mutual funds starting today held for more than a year?

A: For long term capital gains made in the current financial year (2017-18) i.e. sale of funds upto March 31, 2018, there is not tax. However, any sale made after 1st April 2018 will be liable to the new LTCG tax. One needs to segregate this LT capital gain into two parts

a) Part one – is LT Capital gains made up to 31st Jan 2018. This will be the NAV of the mutual fund on 31st Jan 2018 minus the cost of acquiring the units;

b) Part two – is LT Capital gains made after 31st Jan 2018. This will be sale price NAV minus NAV of the scheme as on 31st Jan 2018.

As per the tax law, Part one will be exempt. It is the Part two that will be assessed as LT Capital gains for Tax.