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Budget 2018: New Rules on Equity Mutual Fund Taxation from 1st April 2018
As per the Budget 2018 speech, a new Long Term Capital Gains (LTCG) tax on equity oriented Mutual Funds & stocks will be applicable from 1st April. The Finance Bill 2018 was passed by voice vote in Lok Sabha on 14th March 2018. Here’s how new income tax changes will impact the equity investments from 1st April 2018.
1. Long Term Capital Gains
LTCGs exceeding INR 1 lakh arising from Redemption of Mutual Fund units or equities on or after 1st April 2018, will be taxed at 10 percent (plus cess) or at 10.4 percent. Long-term Capital Gains till INR 1 lakh will be exempt. For example, if you earn INR 3 lakhs in combined long-term capital gains from stocks or Mutual Fund investments in a financial year. The taxable LTCGs will be INR 2 lakh (INR 3 lakh - 1 lakh) and Tax Liability will be INR 20,000 (10 per cent of INR 2 lakh).
Long-term capital gains are the profit arising from selling or redemption of Equity Funds held more than a year.
2. Short Term Capital Gains
If Mutual Fund units are sold before one year of holding, Short Term Capital Gains (STCGs) tax will apply. The STCGs tax has been kept unchanged at 15 percent.
3. Tax on dividend distributed by Equity Funds
From 1st April 2018, a 10 percent tax will be levied on the Income arising out of the dividend distributed by equity-oriented mutual funds.
*Illustrations *
| Description | INR |
|---|---|
| Purchase of shares on 1st January, 2017 | 1,000,000 |
| Sale of shares on 1st April, 2018 | 2,000,000 |
| Actual gains | 1,000,000 |
| Fair Market Value of shares on 31st January, 2018 | 1,500,000 |
| Taxable gains | 500,000 |
| Tax | 50,000 |
Fair Market value of the shares as on January 31, 2018 to be the cost of acquisition as per the grandfathering provision.
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Taxation on Equity Mutual Funds (Including all Equity Oriented Schemes)
| Equity Schemes | Holding Period | Tax Rate |
|---|---|---|
| Long Term Capital Gains (LTCG) | More than 1 Year | 10% (with no indexation)***** |
| Short Term Capital Gains (STCG) | Less than or equal to a year | 15% |
| Tax on Distributed Dividend | 10%# |
*Gains up to INR 1 lakh are free of tax. Tax at 10% applies to gains above INR 1 lakh. Earlier rate was 0% cost calculated as closing price on Jan 31, 2018. #Dividend tax of 10% + Surcharge 12% + Cess 4% =11.648% Health & Education Cess of 4% introduced. Earlier, education Cess was 3%
Process of Determining Capital Gains Tax on Equity, which will be applicable from 1st April 2018
- On each sale/redemption find out if the asset is long term or short term capital gains
- If its short term, then 15% tax will be applicable on gains
- If its long term, then find out if its acquired after 31st Jan 2018
- If its acquired after 31st Jan 2018 then:
LTCG = Sale Price / Redemption Value - Actual Cost of Acquisition
- If its acquired on or before 31st January 2018 then the following process shall be used for arriving at the gains:
LTCG= Sale price /Redemption Value - Cost of acquisition
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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