Budget a dampener for equity market investors

■ Long- term capital gain tax on gains exceeding ◗ It has also imposed a 10% tax on income distributed by mutual fund equity schemes to provide a level playing field across growth oriented funds 1 lakh reintroduced

The Budget turned out to be a big dampener for equity market investors as it reintroduced the long- term capital gain ( LTCG) tax on gains exceeding ` 1 lakh at the rate of 10 per cent without allowing the benefits of any indexation. It has also imposed a 10 per cent tax on income distributed by mutual fund equity schemes to provide a level playing field across growth oriented funds and dividend distributing funds.

However to avoid any knee- jerk reaction in the market, finance minister clarified that all gains generated upto January 31, 2018 would be grandfathered. While the proposals are sentimentally negative and could impact fresh flows in the short term till investors recalibrate their investment strategies, experts said the broader momentum in the market would continue as the expected return from the equity market is still higher as compared to other asset classes like gold and real estate. “Over a three year investment period, this makes equity taxation worse than that on debt where LTCG tax at 10 per cent is applicable, but with inflation indexation. This in itself may not be enough to stem the flow of domestic funds into equity markets - as expected equity returns are still high,” said analysts at Bank of America Merill Lynch. After witnessing a steep fall in the intra- day trade, the equity markets staged a smart recovery during the second half of the trading session with foreign portfolio investors ( FPI) pumping in Rs 1,099.78 crore. The Nifty ended the day at 11,016.90, down 10.80 points or 0.10 per cent while the Sensex closed the session at 35,906.66, dropping 58.36 points or 0.16 per cent.

With regards to dividends on equity funds, which were hitherto, tax free now attracting a 10 per cent dividend distribution tax, fund managers are expecting a slight churn in portfolio in favour of growth oriented schemes. “This move may impact flows into funds where investors were primarily entering with the expectation of regular dividends. Infact dividend schemes are now slightly disadvantaged as opposed to growth schemes as LTCG below ` 1 lakh is exempt from tax,” said Kaustubh Belapurkar, director - manager research, Morningstar Investment Adviser India.

Kunal Bajaj, CEO and founder of Clearfunds. com, a SEBI registered online investment adviser said that the move has ensured that there is no arbitrage between dividend and growth schemes.