Capital gain tax is that tax which is imposed on the gains that the investors make by selling their capital assets. Over the years equities have resulted in a significant increase in the wealth creation but it has always had a preferential tax treatment. The government re-introduced the LTCG tax to align this unbalanced treatment of equalities.
As per the new financial policies, a 10% tax is levied on the LTCG on all the mutual fund and equity investments. It is applicable on the gains made from the selling off of the stocks or through equity fund redemption that has been held over one year. The investors who have incurred losses on their equity funds are exempted from the LTCG Tax.
What is the LTGC tax on the mutual funds?
An investor whose long-term capital gain has been accumulated through the redemption of and investments in mutual funds and exceeds the amount ofRs.1 lakh in a financial year is deemed liable for a tax of 10%. The LTCG tax on mutual funds is applicable to the amount accrued on gains from the 1 April 2018 onwards.
Why LTCG tax doesn’t impact in mutual funds?
The following gives us an idea, how mutual funds remain unaffected by the LTCG:
The market condition influences the flow of equity in the stock market; it has nothing to do with the increase or decrease in the rate of tax imposed.
The market is enjoying a sustainable flow of investments due to the courtesy of the Systematic Investment Plans.
The impact of the LTCG tax for the debt funds was also for a short-term. The market witnessed an increase from one financial year to three in the year 2014.
With an increased level of financial literacy, financial planning and trust in the mutual funds, more people are investing in the long-term mutual funds these days.
The opportunity to generate wealth through investments in mutual funds will further encourage more investors to invest in long-term mutual funds
The increased inflow of the new investors will accelerate the growth of the market and will cushion the short-term impact that LTCG tax has on the market flow.
On the basis of Crisil Amfi Equity Fund Platform Index, the equities, which belong to the long-term asset group, has returned around 18% of the annual gain 5 years in a row up to December 2017.
The 10% tax will not have any dramatic or negative impact on the big mutual fund investors.
The small-scale investors may not even come under the tax bracket. Since the amount gained through the mutual funds that are liable for the taxation is over Rs1 lakh in a financial year.
The government has been careful in its policies and has been ensuring that the tax plan doesn’t backfire and deter the investors from investing in the stock market.
To find out more about the LTCG and its impact on the mutual funds, please get in touch with our experts immediately.