3 Reasons Why Equity Mutual Fund is Good Even After LTCG Tax

15 June 2023
6 min read
3 Reasons Why Equity Mutual Fund is Good Even After LTCG Tax
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Based on your holding period, your gains are classified as Short-Term or Long-Term. For example, gains from equity funds held for less than a year qualify as Short-Term Capital Gains or STCG. On the other hand, profits from investments in equity funds held for more than a year are also considered Long-Term Capital Gains or LTCG.

Before the 2018 Union Budget amendments, investors were not mandated to pay any taxes on the LTCG achieved on equity investments. However, long-term Capital Gains on the sale of listed equity shares have been subject to taxation at 10% since April 1, 2018, if the capital gain exceeds ₹1 lakh in a fiscal year.

Investors in the Stock Market and Equity Mutual Funds began to wonder whether Equity Mutual Funds was still an excellent choice to invest in soon after the announcement of the LTCG Tax in India. Additionally, many myths and rumours have circulated in the markets, leading many people to act the wrong way.

This blog post has outlined various reasons why Equity Mutual Funds are beneficial even after LTCG.

Justifications For Why Equity Mutual Funds Remain a Wise Choice

1. Minimal Effect of LTCG Tax

Due to a provision that permits the acquisition cost to be taken as the market value on January 31, 2018, the impact is not very severe. According to the Union Budget 2018, LTCG Tax was due on profits booked after March 31, 2018.

In other words, you avoid paying taxes if you sell an Equity Mutual Fund or Stock you have held for more than a year before March 31, 2018. However, LTCG Tax will be applied to the gains made if you sell it on or after April 1, and only gains accruing since February 1 will be subject to the LTCG Tax.

Additionally, this tax is only levied if LTCG exceeds ₹1 lakh in a fiscal year. Therefore, if an investor made ₹1,20,000 in long-term gains in a year, the LTCG tax is only applicable for ₹20,000, or ₹1,20,000 – ₹1,00,000. Consequently, the tax is ₹2,000. This significantly lessens how much the LTCG Tax affects Equity Mutual Funds.

2. The Largest Investment Tool

Even with the LTCG Tax, Equity Mutual Funds are still the best investment vehicle for creating long-term wealth. Equity Mutual Fund investments have the potential to outperform returns from most other savings and investment schemes available in India, even after a 10% tax on your Long-Term Capital Gains.

According to the CRISIL AMFI Equity Fund Performance Index for December 2017, the CAGR for Equity Mutual Funds over 1 year, 3 years, and 5 years was 35.59%, 13.08%, and 17.64%, respectively. As a result, investing is not discouraged by the LTCG.

3. Excellent Liquidity

Equity Mutual Funds have very high liquidity. If an Equity Mutual Fund scheme underperforms for an extended period, you can always sell it easily. However, choosing between other investment instruments, like fixed deposits, insurance policies, etc., will not be easy.

One of the significant changes mentioned in the 2018 budget is the Long-Term Capital Gains Tax, which affects both retail and foreign portfolio investors. Investors have adapted to this new tax system, but it may have a short-term emotional impact because Equity Investments have historically produced positive returns.

Furthermore, as many experts have pointed out, the 10% tax on Long-Term Capital Gains is a subsidized rate.

Other significant reasons-

  • Long-Term Investments

Long-Term Capital Gains Tax should not stop you from investing in or maintaining your equity market position. Experts advise investing more and taking advantage of a market downturn regardless of LTCG or other market downturns.

Long-term systematic investment plans are an excellent way for people to easily access the equity markets at various price points, lower their average purchase cost, and possibly build wealth over time.

We all prefer tax-free investment options, it is fair to say, as investors. However, as long-term investors, we should not be concerned that taxing Long-Term Capital Gains is a new reality regarding stocks or Equity-Oriented Mutual Funds. Those who invest frequently and hold their investments over a long period succeed in the equity markets.

The equity markets continue to offer tax-efficient long-term wealth creation opportunities compared to other investment options, even though this new tax reduces returns overall. Stock prices are affected by market fluctuations, but the business fundamentals that underpin investments are unaffected.

  • Longer the Holding Period, the Lower the Impact of LTCG Tax

You can keep investing in ELSS after the three-year lock-in period if it helps you meet your long-term financial goals. It helps because ELSS has the potential to provide double-digit returns over time while also saving taxes.

If you are in the higher income tax brackets, ELSS is an excellent tax-saving investment that can help you save up to ₹46,800 per year in taxes. Furthermore, ELSS invests primarily in stocks and is one of the few equity-oriented investments that qualify for Section 80C tax benefits up to ₹1.5 lakh per year.

You can also invest in ELSS in the long run because it is an excellent tax-saving investment. It helps because ELSS is both a good investment and a tax saver, which is one of the critical features of a successful tax-saving plan. Therefore, amidst the 10% LTCG Tax on gains exceeding ₹1 lakh per annum, it remains an excellent long-term investment.

  • Select the Alternative That Performs Better in Taxable Returns

You may have observed that after the announcement of the LTCG Tax on Equity-Oriented Funds, many insurance companies promoted life insurance as a good substitute due to the tax-free returns. You must choose an investment to achieve your financial objectives, but only if it fits your risk tolerance. Therefore, avoiding combining insurance and investing is beneficial.

Even with the tax on Long-Term Capital Gains, aggressive investors may be able to invest in ELSS for tax breaks and returns that outpace inflation. However, a life insurance policy must be purchased for mortality coverage only, not for returns. Additionally, despite the tax-free benefit, the returns you receive from life insurance plans like ULIPs may be lower than those from ELSS.

  • ELSS Continues to Remain the Most Efficient Choice for Retail Investors 

ELSS is a great investment option for retail or individual investors to save taxes and may eventually provide returns that outperform inflation. According to the Income Tax Act of 1961, ELSS is a Tax-Saving Mutual Fund that is eligible for the Section 80C Tax deduction of up to ₹1.5 lakh annually.

The shortest lock-in period between all Section 80C possibilities is three years, which it has. Additionally, among Tax-Saving investments, ELSS has the potential to provide the highest returns over time. Through a Systematic Investment Plan or SIP, you might think about investing in ELSS. It aids in your regular, fixed-amount ELSS investments. You can use the SIP to support as little as ₹500 per instalment in the ELSS.

 Conclusion

Depending on how an Equity Mutual Fund investment is created and units are redeemed, the impact of LTCG may be lessened. However, investors seeking to invest in Equity Funds should not be discouraged by Long-Term Capital Gains on those funds. These still have the potential to build wealth because fund managers expertly manage them.

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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