2018 Finance Budget: What Happened With Mutual Funds?

After demonetization, many small investors started investing their money in financial assets like mutual funds in opposition to gold and real estate investment. Post demonetization many funds gave hefty returns from 30% to 50% in a year. As per the new budget rules, long term capital gains in equity will be levied for 10% tax without indexation benefit. Indexation benefit means inflation adjusted benefit. The profit you earn by selling your equity investments after holding them for 365 days or more than that is known as long term capital gains. Equity investments include stocks/shares, equity mutual funds, ELSS funds, balanced funds, equity savings funds and arbitrage funds. Since 2004 the long term capital gains were not taxed by the government but from the upcoming financial year a long-term capital gains tax of 10% is levied to equity mutual funds for returns more than Rs. 1 Lakh. The long term capital gains will effect directly on your equity returns. The 15% tax on short-term capital gains hasn’t changed.

The gains earned by the investments before January 2018 are grandfathered. That means if you have gained more than Rs. 1 lakh profit on your investment before January 2018, the amount won’t be taxable. The returns gained after 1st February 2018 will be considered for taxation. If you sell your funds before 1st April 2018 (before the new finance year begins) you won’t have to pay any tax amount on the cost of acquisition of your funds.

Let’s say, you purchased your assets on January 2015 as Rs. 100 per unit. You decide to sell those assets in May 2018. The sale price per unit of your asset has increased and now it’s at Rs. 150 per unit. Now consider that the market value of your asset as per 31st January 2018 is Rs. 130. From the sale price and market value, you choose the lowest amount i.e. Rs. 130 which becomes your cost of acquisition. The difference between total sale and acquisition value is the capital gain you have earned. You will be taxed on the profited amount as it results to be more than Rs. 1 lakh. But if the market value of your assets is lower than as it was on 31st January 2018, your sale price becomes your acquisition cost. As the sale and acquisition value is same, there are no gains or profit. Thus you won’t be levied to pay any tax. Also, if you decide to sell your assets after 1st April 2018 but the market value of your assets is lower than your purchase value, the purchase price becomes your cost of acquisition. You will have to pay tax on your capital gains here as they result to be more than Rs. 1 lakh. If you have purchased any assets after 31st January 2018, your purchase price becomes the same as your cost of acquisition. You will have to pay 10% tax on your long term capital gains in future for investment of more than a year which has earned you profits of more than Rs. 1 lakh.

Also until now government did not impose Dividend Distribution Tax i.e. DDT on equity oriented mutual fund scheme. Only debt mutual funds had to pay 28.84% of DDT. But from now on mutual fund houses will also have to pay 10% of tax on dividends declared under equity schemes. The tax is paid by the mutual fund houses out of their declared profits not by the investors. But this will affect the NAV (Net Asset Value) of the funds bought by the investors.

Though there is tax levied on long term capital gains, we strongly believe that mutual funds remain as best option for your long-term money growth.

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