Posted On Tuesday, Feb 13, 2018
The Government has recently re-introduced Long Term Capital Gains (LTCG) tax on sale of equity shares or units of equity mutual funds. We would like to take this opportunity to inform our investors the impact of this tax on investment in mutual funds. We have used information which is available from the budget document and we will keep you informed if any modification takes place
About LTCG Tax
Investors will now have to pay 10% tax on capital gains (Plus Applicable Surcharge and 4% Health Education Cess) arising from sale of above investments if the investment is sold / redeemed after 1 year or more. The LTCG will be calculated after deducting Rs. 1 lakh from the overall gains made by selling equity shares of a company or units of equity mutual fund for that financial year.
The LTCG tax will be imposed only on the long-term capital gains exceeding Rs. 1 lakh on or after April 01, 2018. Gains accrued up to January 31, 2018 will continue to be exempt. So, if the LTCG is less than Rs.1 lakh in a financial year, then you are not liable to pay any LTCG tax. If the Long term gains are more than Rs.1 lakh, let's say Rs.1.50 lakh, then taxable LTCG will be Rs.50,000 (Rs.1,50,000 – Rs.1,00,000) and tax payable on this LTCG will be Rs.5,000 (10% of Rs.50,000). The table below will help you in understanding how LTCG is taxed with different examples.
|Tax Scenario for Equity Shares/ Equity Mutual Funds Units|
|Scenario||Purchase Date||Purchase Value (Rs.)||Value as on January 31, 2018 (Rs.)||Sale Date||Sale Value (Rs.)||Difference between Sale Value and Purchase Value/Market Value of January 31, 2018 (Rs.)||Tax|
|1||On or before April 01, 2017||1,00,000||1,50,000||March 31, 2018||3,00,000||3,00,000 - 1,00,000 = 2,00,000||No LTCG tax. LTCG Tax is applicable from April 01, 2018.|
|2||On or before May 01, 2017||1,00,000||1,20,000||April 30, 2018||1,40,000||1,40,000 - 1,20,000 = 20,000||No LTCG tax. Tax applicable on gains exceeding Rs.1 lakh|
|3||On or before May 01, 2017||5,00,000||6,50,000||April 30, 2018||8,00,000||8,00,000 - 6,50,000 = 1,50,000||LTCG Tax applicable on gains exceeding Rs.1 lakh (1,50,000 - 1,00,000) = 50,000 |
Tax is Rs.5,000 (10% of Rs.50,000)
|4||On or before May 01, 2017||4,00,000||2,00,000||April 30, 2018||6,00,000||6,00,000 - 4,00,00 = 2,00,000||LTCG tax is applicable on gains exceeding Rs.1 lakh (2,00,000 - 1,00,000 )= 1,00,000|
Tax is Rs.10,000 (10% of Rs.1,00,000)
One advantage for investors who have invested before Jan 31, 2018 is that the market value of investments as on Jan 31, 2018 will be considered as Cost of Acquisition for calculating LTCG instead of the Actual Cost at the time of purchase (Scenarios 2 & 3 of the above table explains the benefit of this clause). If the market value of investments as on Jan 31, 2018 is less than the Actual Cost of acquisition, the Actual Cost will be considered for calculating LTCG ( Refer Scenario 4 in the above table).
As a long term investor, you should not be worried about the Long Term Capital Gains tax. If we take scenario 3, the tax payable on the redemption amount of Rs.8,00,000 and Capital Gains of Rs.1,50,000 is Rs.5,000/- which is 0.63% on redemption amount and 1.67% on Actual Gains (Rs.3,00,000 = Rs.8,00,000 - Rs.5,00,000) respectively.
After the re-introduction of the LTCG tax, it makes more sense for investors to focus now on choosing right funds that meet their investment objective which will help them achieve their financial goal over long term.
The Central Board of Direct Taxes (CBDT) has issued 24 frequently asked questions (FAQs) on long term capital gains (LTCG) taxation on equity shares proposed in the recent Union Budget. Click here to know more
So irrespective of taxation , equities have a potential to grow and it is advisable to be invested in this asset class for long term.
* The 4% Health & Education Cess will be applicable on the tax amount and not on the gains. So taking Example 3 ahead - the Cess will be applicable on the tax amount payable (Rs. 5,000) and not on gains (Rs. 50,000). Surcharge willbe applicable based on the level of income of the investor.
PersonalFN, a service brand of Quantum Information Services Pvt Ltd (QIS), and is focused on providing research solutions and financial planning; have made a detailed guide on LTCG & DDT: Its Impact On Your Equity Mutual Funds. Click here to read.
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The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – https://www.quantumamc.com/disclaimer to read scheme specific risk factors.
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