Budget 2018 – Impact On Mutual Fund Investors

By Sanesh Mathew | February 9, 2018

Budget 2018 proposed a 10% long-term capital gains tax on equity Mutual Funds and it created quite a ruckus among equity investors. But is the new tax rule really a cause for worry? Here’s our take on the issue.

Budget 2018 - Impact On Mutual Fund Investors

Much was expected from this year’s Union Budget. Although our Finance Minister Jaitley tried to put across a neutral, non-disruptive budget, it turned out to be nothing short of a disappointment for many.

One of the key disappointments from the Budget was the addition of tax on equity Mutual Fund gains. This decision wreaked havoc among Mutual Fund investors. But is it really a big negative for equity investors? Let’s discuss the impact of the Long-Term Capital Gains (LTCG) tax on Mutual Fund investors and the equity market, shall we?

Additional Reading: Union Budget 2018 Highlights

The Big Decisions That Caused All The Ruckus

LTCG Tax On Mutual Funds!

Since its inception, equity Mutual Fund investors enjoyed the zero-tax advantage that came with their long-term capital gains. Equity investors who invested in funds and sold them after holding for a year didn’t have to pay any LTCG tax. However, this year’s Budget has proposed a 10% LTCG tax on equity funds when the returns exceed Rs. 1 lakh.

This new tax ruling has been proposed with the grandfathering clause, in order to protect the sentiments of existing investors. So, the new tax law will be applicable only from the next financial year, i.e. FY 2018 – 2019. In other words, any long-term capital gains on equities up to March 31st, 2018 will be exempt. This means that there will be no tax on any capital gains from selling funds before 31st March. However, if you’re making the sale after 1st April, 2018, then the tax implication will be as follows:

  • For long-term capital gains made on or before 31st January, 2018 – These gains are ‘grand-fathered’, i.e. there will be not be taxed
  • For long-term capital gains made after 31st January, 2018 – Tax is applicable

Dividend Distribution Tax On Equities!

Although not as harrowing as the LTCG tax proposal, there was another tax proposed for equity Mutual Funds. If you’ve invested in an Equity Mutual Fund with the dividend option, then the dividends you receive will attract a 10% dividend distribution tax.

Dividends in Debt Mutual Funds already attract a dividend distribution tax at 25%. Now dividends on equities have also joined the tax bandwagon.

Additional Reading: This Is How Budget 2018 Announcements May Help You Save Tax

The Big Question – To Worry Or Not?

Though these seem like big negatives for equities, it is actually not if you observe closely. Of course, the new ruling has hurt investor sentiments. But even with the LTCG tax, equities are still the lowest-taxed investment option in the market. And equities are still the best investment avenue if you’re looking to grow your money over the long term.

Even the dividend distribution tax isn’t something to be concerned about. Let us tell you why. For starters, the whole idea of getting ‘dividends’ destroys the primary objective of equity investments. You invest in equities to grow your wealth over time. Receiving dividends, on the other hand, hampers wealth creation since it provides you with disposable cash.

We agree that the dividend option was popular once upon a time. But that was when it came with tax efficiency. And that was a long time ago. Today, as an investor in equities, your prime objective should be to grow your money. And dividends aren’t a great option for that.

Summing up, there is little to nil cause for worry with the new equity-oriented Mutual Funds tax proposals from the Budget 2018. Of course, there are going to be a lot of knee-jerk reactions for a few months. But, eventually, both investors as well as the equity market will digest these new tax rules.

Bonus Read: Union Budget: Expectations Vs Reality

Got a different take on the LTCG tax and dividend distribution tax? Let us know in the comments section below. And if you are one among the many who is yet to invest in Mutual Funds? It’s the right time to start investing.

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