You don’t need to fear the 10% tax on equity. Here’s why.
One of the highlights of Budget 2018 was the proposal to tax long-term capital gains from equity instruments at a rate of 10%, without the benefit of indexation. Inevitably, this has led to a lot of confusion among the investing community. Investors have various queries not only on the impact of the tax on their existing investments but also on their strategy going forward.
Here are a few pointers you can keep in mind to better quantify the effect of LTCG on your financial portfolio, and take prudent financial decisions that will serve you well over the long term.
Understand the Tax
As per the announcement, long-term capital gains of over Rs. 1 Lakh made after January 31, 2018, on shares and mutual funds will attract a non-indexed 10% tax. All gains made until the mentioned date are, however, grandfathered and will remain tax-free. Similarly, equity-oriented mutual funds will also be subject to a 10% dividend distribution tax (DDT) to ensure parity with the 10% LTCG tax on growth based mutual funds. The tax policy on debt mutual funds remains unchanged.
Prefer Mutual Funds
If you have been on the fence between jumping into direct equity versus picking actively managed mutual funds, the presence of the LTCG may help you make a decision to veer in the latter direction. After all, the trading done by the fund manager within the portfolio is not taxable to the investor, and it continues to provide you with the best chance to surpass inflation and generate wealth over the long term.
If you are so inclined, you can also attempt to make use of the Rs. 1 Lakh tax-free provision contained in the announcement. You can do this by selling investments that have made that amount of gain, and purchase the same instrument again with the withdrawn corpus and the gains made. While you may lose out on the power of compounding, this can potentially save you Rs. 10,000 across a financial year. However, you should explore the vagaries of your financial portfolio before making a decision one way or the other on this approach.
If mutual funds are still your investment of choice, you are, as always, best advised to lock into a long-term SIP. This will ensure that you have the benefit of rupee cost averaging and are able to tide over various phases of the inherent volatility in the stock market.