TAXING TIMES?
Long-term capital gains tax on equity investments has made a comeback after 13 years. Here’s how it will impact you
The reimposition of long-term capital gains tax (LTCG) on equity investments elicited mixed reactions, but most industry experts believe it will not have a significant impact on domestic equity investment inflows over the long term.
There will now be a 10 per cent tax on capital gains exceeding Rs 1 lakh, accrued from equity investments held for over a year. All capital gains accrued up to January 31, 2018, though, are ‘grandfathered’, meaning they are exempt from the new tax. For example, assume you made an investment on April 15, 2017, and accrued capital gains of Rs 1.2 lakh by January 31, 2018, and that this amount further grew to Rs 1.5 lakh by April 16, 2018, you would have to pay a 10 per cent tax only on Rs 30,000 or the gains exceeding Rs 1 lakh made after January 31.
In addition to LTCG, there’s also a 10 per cent tax on distributed income from equity-oriented mutual fund (MF) schemes. So, if you have opted for the dividend option of an equity- oriented scheme, your mutual fund AMC (asset management company) will pay an additional 10 per cent tax on the amount so distributed to you. Dividends will still be tax-free in the hands of the investor.
TAX IMPACT
As the government has rationalised the taxation structure, the advantage equity enjoyed over fixed income and other asset classes is no longer in place. So has it lost its attractiveness as an asset class? Industry experts do not think so. “LTCG was talked about, it was not unexpected,” says Radhika Gupta, CEO of Edelweiss Asset Management. “Beyond a point, we now move to a tax regime that is 10 per cent. We have to live with it. In spite of that, equity continues to be one of the most attractive asset class for the investor compared to gold, real estate or any other option.”
Some also believe LTCG will now bring equity on a fair playing ground. “The 10 per cent tax on the outcome does not take away from the fact that equity remains the asset class with the most potential for long-term growth. All other asset classes have tax on income as well as gains,” says Aashish Somaiyaa, CEO, Motilal Oswal Asset Management Company.
Which is why the industry hasn’t witnessed major outflows. “We have seen no reaction from investors. There was some uncertainty in the run-up to the budget and people did fear that if the tax comes back, they would have to pay taxes on the old gains. Thankfully, that didn’t happen. SIP flows and other inflows in equity MFs are continuing, the news of capital gains tax has been taken in its stride,” says Somaiyaa. He also believes LTCG would to a certain extent benefit the industry by preventing premature redemptions. “People who were paying zero tax on capital gains are now going to pay 10 per cent tax, which means they will be cautious about redeeming unless they are absolutely sure. They will postpone redemptions, stay on in the schemes,” Somaiyaa adds.
THE WAY FORWARD
Industry experts have advised investors to stick to their financial plan and asset allocation as even now equity continues to be a great asset class. Those who might be considering unit-linked insurance policies—which continue to enjoy tax benefit under Section 10 (10D) of the Income Tax Act—must understand that ULIP is a different asset class altogether as it is an insurance product. So, a comparison with an equity mutual fund scheme would hardly be fair.
“Even with the 10% tax on the outcome, equity remains the asset class with most potential for long-term growth” Aashish Somaiyaa CEO, Motilal Oswal Asset Mgmt Co.