LTCG impact: Keep few pointers in mind prior to making investment
FM Jaitley proposed to tax LTCG exceeding Rs 1 Lakh at the rate of 10% without allowing the benefit of any indexation, saying “all gains up to 31st January, 2018 will be grandfathered.”
'Disclaimer: This story is for informational purposes only and should not be taken as investment advice.'
One of the major changes in presenting Union Budget 2018 was imposing tax on the Long Term Capital Gains (LTCG) with a new mechanism by Finance Minister Arun Jaitley.
To all those who are frequent equities and mutual funds investors would like to know about LTCG, as it will impact their portfolio at greater extend now.
The Finance Minister proposed to tax LTCG exceeding Rs 1 Lakh at the rate of 10% without allowing the benefit of any indexation, saying “All gains up to 31st January, 2018 will be grandfathered.”
A tax on distributed income by equity oriented mutual fund at the rate of 10% was also proposed for providing level playing field across growth-oriented funds and dividend distributing funds.
Currently, LTCG deriving from transfer of listed equity shares, units of equity oriented fund and unit of a business trust are exempt from tax.
Investors have taken advantage of this exemption, tapping Indian markets to whole new level presently.
Such changes of FM, comes as a surprise for market experts, who were hoping increase in short term capital gains on stock exchanges for 3 years.
Currently, if a person who sells equity shares listed on stock exchanges within 12 months of his buying, he enters into short term capital gain which comes under tax net. The STCG will continue to be taxed at 15% rate on distribution of equity oriented at 10%.
Now, investor need not only to take care of STCG while making investment in Indian markets, but also need to know the effect of LTCG.
Here are a few pointers you can keep in mind to better quantify the effect of LTCG on your financial portfolio, as per BankBazaar report.
Knowing the Tax
According to Jaitley, all gains up to January 2018 are grandfathered which means your profit during this date will be tax free.
While 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, as per the report.
It may be noted that the trading done by the fund manager within the portfolio is not taxable to the investor, and it would help in providing you with the best chance to surpass inflation and generate wealth over the long term.
You can also attempt to make use of the Rs 1 Lakh tax-free provision contained in the announcement by selling investments with that particular amount of gain, and purchase the same instrument again with the withdrawn corpus and the gains made.
However, an investor may lose out on the power of compounding, although it has potentially of saving Rs 10,000 across a financial year.
In case you like to invest more in mutual funds, it is best advised to lock into a long-term SIP, as it ensures 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.
However, you should first know about your taxes on capital gains over investment in equities and mutual funds. Its better to seek knowledge from the financial advisors while selecting portfolios in Indian markets.