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3 Takeaways out of the LTCG & 2018 Budget Announcements

The government in 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

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 continues at 15 percent.

Let us take an example, if an equity mutual fund is purchased 9 months before 31st January 2018 at an 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 wont 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 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.

2. Should You Switch To Direct Plan Mutual Fund – Now vs Later?

The short answer is Yes. The more you postpone the switch the more long term gain you accrue. And you end up paying 10% of that as tax!

Switching to Direct Plan Mutual Funds is very easy with Jama.

3. Move to Growth Plans instead of Dividend Schemes?

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 dividend.

Savvy investors may instead use the 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, totalling to 28.84%.

Conclusion

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 are growing at 20% per year. Secondly consider switching to growth plans instead of dividend plans as they entail a lesser tax outgo.

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Ram Kalyan Medury

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