If you are a mutual fund investor or are planning to enter the equity markets by choosing to invest in mutual funds, it is essential to understand your taxation aspects post budget. Finance Minister Arun Jaitley in his last full budget before the 2019 elections announced two major taxation decisions related to equity investments. The first is a 10% Dividend Distribution tax (DDT) on dividend options of equity funds and the second, the reintroduction of long-term capital gains tax applicable for gains exceeding Rs 1 lakh from the sale of equities to be taxed at 10% without indexation.
So does this mean you should reconsider investment in Mutual Funds or look for other alternatives than investing in a growth oriented fund over a dividend pay-out fund? Here is everything you need to know before taking a final decision over your mutual fund investments to make them both tax friendly and financially viable.
Core Factors For Ascertaining Mutual Fund Taxation
Before worrying about the tax on such investments, know that your tax outgo is dependent on three essential parameters — residential status, type of mutual fund investment and the holding period.
Your residential status plays an essential role as tax rates are different for both resident Indians and non-resident Indians or NRI investors. The second essential component is the type of mutual fund investment. Any fund which invests 65% or higher in equity comes under the equity fund category and is taxed accordingly. Funds with a lower equity component than 65% continue to be considered as debt funds for taxation purposes. For all equity funds, a holding period of less than 1 year is short term while over 1 year is considered long term. For debt funds, any investment for less than 3 years is considered short-term and tax rates are applicable accordingly.
Mutual Fund Investments and LTCG Tax
Gains from the sale of any stock or equity oriented fund exceeding a minimum limit of Rs 1 lakh after January 31, 2018, will now be taxed at 10% without indexation. The tax is not retrospective and all gains before Jan 31, 2018, are exempt from the ambit of this tax.
For example, if you invested in equity mutual fund with a NAV of Rs 100, six months prior to Jan 31, 2018, assuming that the NAV of the unit was Rs 120 as on Jan 31, 2018, you will be taxed on LTCG for gains over Rs 1 lakhs. Short-term capital gains tax continues to be in place and taxed at 15%.
Mutual Fund Investments and Dividend Distribution Tax (DDT)
If you have been investing in mutual funds with a dividend option, there was no DDT for individual investors. The amount received as the dividend by the mutual fund company was tax-free in your hands as an investor. Post Budget 2018, DDT at the rate of 10% is now applicable to every individual equity investor.
Mutual fund investments And Security Transaction Tax (STT)
For sale of all equity-oriented mutual funds, an STT of 0.001% is levied by the fund company for all such sales. The STT continues to be the same for all equity-oriented mutual funds along with the DDT taxation.
Mutual Fund Investments And Tax Rates for FY 2018-19
With LTCG tax and 10% DDT, investment in growth and dividend mutual fund investments are almost at par. If the final post-tax return on investments continues to be lucrative, the new taxation decision should not lead to any alarming change in your mutual fund asset allocation.