Soon after the announcement of LTCG tax in India, share market and equity mutual fund investors starting questioning if equity mutual funds were still a good option to invest in. To add to that, numerous rumours and myths have flaoted the markets prompting many people to take wrong steps.
3 reasons why equity mutual fund is still a good option
1. Minimal Impact of LTCG tax
The impact is not very bad because of provision which allows the cost of acquisition to be taken as the market value on 31st January 2018 (as we have seen in above calculations).
The Union Budget 2018 proposes that LTCG tax will have to be paid on profit booked after March 31, 2018. This means if you sell before March 31, 2018, a stock or an equity mutual fund that has been held for more than a year, you do not pay tax.
But, if you sell it on or after April 1, LTCG tax will apply on the gains made and only the gains accruing from February 1, 2018 will be subject to the LTCG tax.
Also, this tax is applicable only if LTCG is above ₹ 1 lakh in a financial year. So, if an investor made long-term gains of ₹ 1,20,000 in a year, LTCG tax is applicable only for ₹ 20,000 i.e. ₹ 1,20,000 – ₹ 1,00,000. So the tax comes to be ₹2,000.
This will greatly reduce the impact of LTCG tax on equity mutual fund to great extent.. See how LTCG tax is calculated : LTCG Tax Calculation Examples: How it is Done
2. Best Investment Instrument
Despite the LTCG, an equity mutual funds still remain your best investment instrument for long-term wealth generation.
Even after a 10% tax on your long-term capital gains, equity mutual fund investing have the potential to outperform returns from most other savings and investment schemes available in India. As per the CRISIL AMFI Equity Fund Performance Index for December 2017, equity mutual funds had a CAGR of 35.59% in one year, 13.08% in three years, and 17.64% in five years. Therefore, the LTCG is certainly not a deterrent to investment.
3. High Liquidity
Liquidity of equity mutual fund is very high. You can always easily sell an equity mutual fund scheme if it underperforms for a long period.
However, the decision won’t be simple in case of other investment instruments like Fixed Deposits, Insurance covers etc.
LTCG tax is one of the major amendment announced in budget 2018 impacting all investors including foreign portfolio investors as well as retail investors.
But will have a short-term sentimental impact, investors will adjust to this new tax regime keeping in mind that equity investments have yielded good returns over the long-term.
Also, significantly pointed by many experts, the 10% tax on LTCG is a subsidized rate.
Taxation on Equity Mutual Fund Schemes
Capital gain on equity mutual fund schemes is referred to the profit that an investor makes by redeeming or selling the stock or mutual fund unit. It can either be Short Term Capital Gain or a Long-Term Capital Gain depending on holding period of units. Tax applicable on capital gain from these units is known as Capital Gain Tax.
Short-term Capital Gain (STCG) tax:
This is applicable on stocks or equity oriented mutual funds held for a period of 12 months or less i.e. anything less than 1 years. In short-term capital gain tax rate on these funds is 15% per annum on the amount of gain. No change in this tax announced in latest union budget 2018.
Long-term Capital Gain (LTCG) tax:
This is applicable on stocks or equity oriented mutual funds held for a period of 12 months or more i.e. anything more than 1 years. In long-term capital gain tax rate on equity funds before the announcement of union budget, 2018 was NIL.
In union budget 2018, Finance Minister has introduced a Long-Term Capital Gains Tax of 10% for Capital Gains exceeding ₹ 1 lakh in a year. This tax will be charged without providing the benefit of indexation.