LTCG and Grandfathering explained
18th April 2018

Please find below an update on the key changes in tax laws applicable to Mutual Funds in the Union budget 2018:

  1. Long Term Capital Gain to be taxed at 10% without indexation on Equity Mutual Funds as well as listed Equities:

Mutual Fund units as well as listed Equities would going forward be taxed at the rate of 10% if held for a period of more than 12 months and on capital gains exceeding  Rs. 1 Lakh in a year. However, the government has clarified that all gains made till 31st Jan’ 2018 would be grandfathered.

Grandfathering basically means that the cost of investment acquired before 1st Feb’ 2018 would be the higher of :

  • Actual cost of acquisition or
  • Fair Market Value as of 31st Jan’ 2018.
  1. Grandfathering can be explained as below:
  1. Investment was bought on 1st Jan’ 2017 at the cost value of Rs. 100
  2. The market value of the investment on 31st Jan’ 2018 is Rs. 130
  3. The investor wants to sell the investment on 30th April’ 2018,when the value is Rs. 150.
  4. Now, on 30th April’ 2018, the cost value of the investment would be taken as Rs. 130 and not Rs. 100.
  5. The capital gains would be paid on Rs. 20 (150-130).
  6. The capital gains tax would be Rs. 2.
  1. Dividend Distribution tax would be applicable on Equity Mutual Funds:

Any amount paid out as dividend by an equity mutual fund would be subject to a dividend distribution tax at the rate of 10%. This dividend received by the investor would be post deduction of DDT. This would mean that an investor is better off being in a growth plan as in a growth plan he would have to pay tax only when he exits whereas in a dividend option, he would have paid tax of 10% every year.

Please note: As per the Finance Bill, both the long term capital gain and DDT will take effect from 1st April’ 2018 but we still await clarity on the timelines.

  1. Mutual Funds emerge as a better investment vehicle to participate in Equities post the changes in tax laws:

 Post the changes in tax laws, Mutual Funds emerge as a better vehicle to participate in equities vis-à-vis a PMS or Direct stocks as can be explained below:

  • A PMS investor would pay tax on both short term and long term changes / churn in portfolio.
  • A direct stock investor would too pay tax on both short term and long term changes / churn in portfolio.
  • A mutual fund investor, on the other hand, would not pay any tax on either short term or long term changes / churn in portfolio. An investor would pay tax only when he exits from his investments from the mutual fund. This brings in benefit of tax deferment making an MF investment most tax efficient.
Aditya Shinde
15 September 2017
All is ok, but why all taxes are imposed on common man without any economic discrimination, why should poor & rich person in same get slab,do u think common man show his electricity bills, praperty tax, water tax & etc, as input tax? Actually it is favour to govt administration & business simplifications, this is not a favour to common the basic nessacity commodities like packed food items taxes are raised. Is it good to public?
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