For some time now, the LTCG (Long-Term Capital Gains) tax on equities and equity-oriented mutual funds have become a reality. During the Budget 2018 speech, the former Finance Minister Arun Jaitley had re-introduced the LTCG Tax. While gains made in equities up to January 31, 2018, were grandfathered, gains on MF unit redemptions are subject to the LTCG tax starting February 1, 2018. As an MF investor, this new tax applies to long-term capital gains when you redeem your equity mutual fund holdings. However, in most cases (and definitely for the SIP investors) it becomes a tedious task to calculate the applicable taxes. So here’s all that you need to know about the new LTCG tax and how to calculate tax on your long-term equity gains.
“The best things in life are free, but sooner or later the government will find a way to tax them.”
Every income does attract taxes. While the equity investors have long enjoyed zero taxes on long-term equity returns, all good things must come to an end. And with the re-introduction of the LTCG tax, long-term gains in equities (above Rs. 1 lakh a year) now attract a 10% tax without any indexation benefit. For mutual fund investors, funds that have an equity exposure of over 65% fall under the category of equity-oriented schemes where the new tax applies.
While the grandfathering (tax-exempting) of gains made before January 31, 2018 came in as a relief for the investors, the new tax applies on the gains starting February 1, 2018. However, the Effective Date for the tax applicability is set on April 1, 2018 (that will be covered further on in this article).
As a mutual fund investor, you must have wondered about the nitty-gritty of this new tax. It’s definitely a tedious task for a retail investor to understand this tax, let alone the calculation aspect. So while it’s here to stay, let’s understand the different aspects of LTCG tax:
What Accounts for Long-Term – The Holding Period:
First of all, let’s be clear that the LTCG tax only applies to the ‘redemption’ of your equity MF units during a particular financial year. There is no tax applicable on the accrued gains from your mutual fund holdings.
Now, for any equity mutual fund investor, a holding period of at least 12 months or more (from the date of investment) is regarded as long-term. So if you happen to book profits on your mutual funds after a holding period that’s higher than 12 months, you’ll potentially have to pay the LTCG tax. That only if your returns go beyond 1 lakh during a particular financial year.
LTCG Tax Calculation:
Like we mentioned earlier, the new LTCG Tax applies to the gains accruing from February 1, 2018. However, it’s important to mention that that long-term capital gains tax is effective from April 1, 2018. Confusing isn’t it?
So essentially, there might broadly be three cases for any mutual fund investor. Let’s analyze each one by one!
- April 1, 2018 – The LTCG Tax Era Begins:
Long-Term Capital Gains occurring prior to the ‘Effective Date’ April 1, 2018 are completely tax-exempt. This essentially means that (subject to the holding period of 12 months is met), irrespective of your investment date, any long-term gains arising out of the sale of your equity MF units prior and until March 31, 2018 will not be taxed.
|
MF Investment Date |
MF Redemption Date |
12-Month Holding Period |
LTCG Tax Category |
|
05-01-2016 |
Up to 31-03-2017 |
Yes |
Tax-Exempt |
|
31-03-2017 |
Up to 31-03-2017 |
Yes |
Tax-Exempt |
Takeaway: Only long-term investments sold on or after April 01, 2018 will be taxed.
- February 1, 2018 – The Grandfathering Date:
Accrued gains up to February 1, 2018 are grandfathered. So let’s say, you have made mutual fund investments prior to the grandfathering date, your accrued gains (if any) are tax-exempt. Your actual purchase cost or the NAV on January 31, 2018 (whichever is higher) will be considered for tax calculation purposes. Let’s understand this with a couple of examples:
|
MF Investment Date (Should be Prior to the Grandfathering Date) |
Units |
Purchase Price |
NAV as on 31.01.2018 |
Applicable NAV for Tax Calculation Purposes (Higher of the Two) |
|
05-01-2016 |
200 |
50 |
55 |
55 |
|
05-02-2016 |
166.67 |
60 |
55 |
60 |
|
05-03-2016 |
181.82 |
55 |
55 |
55 |
|
05-04-2016 |
188.68 |
53 |
55 |
55 |
|
05-05-2016 |
175.44 |
57 |
55 |
57 |
So, as per the applicable NAV, your total acquisition cost would be ‘No. Of Units x Applicable NAV’ which in this case comes out to be Rs. 51,377/-. Now if you were to sell these MF units after the effective date (say 11.06.2019) at a NAV of Rs. 70/- you would qualify for LTCG tax. This works out at ‘Total Redemption Proceeds – Applicable Acquisition Cost’. In our case, the redemption proceeds come out at 912.60 units x 70.00 = 63,882/-. So your LTCG gains of Rs. 12,505/- (Rs. 63,882 – 51,377) would be taxed at a flat rate of 10% without any benefit on indexation.
- February 1, 2018 – April 1, 2018:
Unlike the investments made prior to the grandfathering date, MF units purchased anytime after the grandfathering date of February 1, 2018 are taken at actual acquisition cost for the consideration of tax calculation purposes. Any gains that are accrued between the ‘Grandfathering Date’ and ‘Effective Date’ will NOT receive the benefit tax-exemption.
|
MF Investment Date (Should be After the Grandfathering Date) |
Amount |
Purchase Price |
No. Of Units |
Total Acquisition Cost |
|
01-02-2018 |
10,000/- |
65 |
153.85 |
10,000/- |
|
01-03-2018 |
10,000/- |
61 |
163.93 |
10,000/- |
|
01-04-2018 |
10,000/- |
60 |
166.67 |
10,000/- |
|
01-05-2018 |
10,000/- |
69 |
144.93 |
10,000/- |
|
01-06-2018 |
10,000/- |
71 |
140.85 |
10,000/- |
As per the above table, your Actual Investment Cost comes out to be Rs. 50,000/-. Now let’s say, you happen to redeem your mutual fund units on 11.06.2019 at the NAV of Rs. 70/-. Here, you have already completed the 12 months holding period for each investment and hence, the entire gains of Rs. 3,915/- will be taxed under the LTCG tax at flat 10% rate.
It’s important to note that for the calculation of tax purposes, first-in-first-out (FIFO) method is applicable. So in case of partial redemptions, the investments cost at the earliest purchase date will be considered for calculation.
Although the LTCG tax-regime is here, this should not dither investors like you to ignore the equity asset class. It’s highly important that you stay invested in equity mutual funds to benefit from high returns. But, if you’re worried that the LTCG tax might make your profit-making mutual fund investments less attractive than contact our professional advisors at 5nance, and we’ll make sure that your mutual fund investments fetch you superior returns.
