LTCG Tax on Equity Mutual Funds

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With the Lok Sabha clearing the Finance Bill 2018, the long-term capital gains tax (LTCG) on equity and equityoriented mutual funds came into force from April 1.

1. What LTCG will investors have to pay on equity-oriented MF schemes in this fiscal?

Till financial year 2017-18, investors in equity-oriented mutual fund schemes who sold them after holding for more than a year paid zero LTCG. Balanced funds, equity savings funds and sectoral funds are also considered as equity-oriented funds as their net equity exposure is above 65%. However, from financial year 2018-19, investors in all these categories of funds will have to pay a 10% LTCG tax on gains made above ₹1 lakh per annum.

2. There is grandfathering provided in LTCG. What does that mean?

The grandfathering clause is the exemption granted to existing investors for gains made by them before the new tax came into force. The government has done this to ensure that investors who have committed money keeping in mind the easier tax regime areprotected. 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?

Since this is a direct tax proposal it will be applicable for the assessment year 2019-20 (Financial Year 2018-19). In other words, long-term capital gains of over ₹1 lakh made for the year 2018-19 will be taxed at 10%.

4. What happens to my tax liability if I sell equity-oriented MFs post April 1?

For calculating LTCG, the following is the method: Purchase price is to be considered higher of (a) and (b). (the idea is that only gains made after Jan 31 are taxable)

a) Actual purchase price

b) Lower of ...

i) Fair market value (it is the highest price / market value as on January 31, 2018)

ii) Full value of consideration (it is the actual sale price). Next, for calculation of the final LTCG amount, exemption of ₹1 lakh is applied. Thus if LTCG as per above is ₹1,20,000 then 10% on only ₹20,000 = ₹2,000 would be applicable.

5. Will dividends on my equityoriented mutual funds be taxed?

Dividends on equity-oriented mutual funds are now taxed at 10%. This provision had to come into effect since LTCG tax of 10% has been levied. If dividends were not taxed, investors would have used it as a opportunity to switch to this option to avoid LTCG

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