The government is today’s budget introduced the much talked about long term capital gains tax (LTCG) on the selling of listed securities on gains of over Rs 1 lakh. This has implications on your mutual fund holdings, more so if you wish to switch to direct plan mutual fund. We will explore this more here.
1. Long Term Capital Gains (LTCG) Won’t Impact Many
2. Should You Switch To Direct Plan Mutual Fund – Now vs Later?
3. Move to Growth Plans instead of Dividend Schemes?
Many people were expecting some change on this front. India has had a liberal regime of 0% capital gains on equities held for more than one year. Most people expected the definition of ‘Long Term’ to change to 2 or 3 years from 1 year. However, the Finance Minister Mr. Jaitley, introduced a long-term capital gains tax of 10 percent if the gains exceed Rs 1 lakh.
There is no benefit of indexation. But any gains made till 31st January 2018 will be grandfathered (ie exempted). Short term capital gains continue at 15 percent.
Let us take an example if an equity mutual fund is purchased 9 months before 31st January 2018 at a NAV of Rs100. The NAV on 31st Jan is Rs120. Any gains in excess of Rs20 earned after 31st Jan 2018 will be taxed at 10 percent. That is if the units are sold after they complete one year (which is 30th April 2018).
However, LTCG won’t impact most people. For 95% or even more investors, the tax payable could be nil given that there is an exemption on the first lakh. Besides the long term, investors can stagger withdrawals. A 10% tax is not a very big deal for a truly long term investors who could be making say 12% to 15% in the long run.
The short answer is Yes. The more you postpone the switch the more long term gains you accrue. And you end up paying 10% of that as tax!
Switching to Direct Plan Mutual Funds is very easy with Jama.
There is also a dividend distribution tax (DDT) of 10% – this might impact your decision on whether you should take out the dividend regularly out instead, switch from dividend to growth schemes to avoid such a tax.
Many investors depend on dividends from equity-oriented balanced funds for their cash flows. DDT will reduce the payout by 10%, though it appears tax-free as the AMCs will deduct DDT before declaring a dividend.
Savvy investors may instead use the growth option and opt for Systematic Withdrawal Plan (SWP) meet regular income needs. This applies to even retired people who depend on dividends for cash to meet monthly expenses. If the withdrawal incurs any growth then anyway the long term capital gain (no dividend here), will also attract 10%. In a way, the tax gets deferred to the time of withdrawal which is a good thing. The money enjoys compounded growth for a longer time!
Readers of this blog know that in the case of debt funds, the AMC already pays a DDT. This covers non-equity funds such as money market, liquid, and debt funds and comes to 25% plus 12% surcharge plus 3 % cess, totaling to 28.84%.
Switch to Direct plan Mutual fund today instead of postponing to some other day. Direct mutual funds are growing at 36% per year compared to Regular which is growing at 20% per year. Secondly, consider switching to growth plans instead of dividend plans as they entail a lesser tax outgo.
One of the Non-Banking Finance Companies, Dewan Housing Finance Limited (DHFL) recently defaulted on its interest payments. This has caused…
We now have a stable government in place at the Center after a gruelling two month long election schedule. The…
Best Mutual Funds 2019 Best Mutual Funds 2019- With the incumbent government retaining power at the center, India is poised…
Doctors being high-income earners are the target of the financial service industry. They are sold ‘investment products’ with huge hidden…
If you are in the know of things, you might have switched your mutual fund portfolios from regular plans to…
The Indian political economy is undergoing turbulent times. Two major events in the last month are significant. How does an India investor…