Budget 2018: Why mutual fund investments continue to remain attractive saving option despite return of LTCG tax

In his Union Budget 2018 speech, finance minister Arun Jaitley revealed that the government was bringing back tax on long term capital gains made on equities, equity linked mutual funds or equity related business trusts. Long term capital is a holding that is with the investor for more than one year and profit made on its sale after the period is considered gain. The tax on LTCG was repealed back in 2004 when the government introduced securities transaction tax (STT) in its place. The LTCG tax will be charged at 10 percent.

As a result of the announcement related to the LTCG tax in the budget, the markets reacted negatively with the benchmark Sensex falling more than 800 points as investors’ sentiments dampened and they rushed for selling their holdings. Broader Nifty also was trading lower on the news.

According to this Times of India report despite the re-introduction of LTCG tax, the investments made in equity related mutual funds still remained profitable. As these instruments have the potential of doing far better than many other equity related saving schemes in the market, the report added.

Representational image. Reuters.

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The Times of India report cites CRISIL AMFI Equity Fund Performance Index to back its claim that such investments still remained profitable. According to this report, for December 2017, equity funds had a CAGR of 35.59 percent in one year, 13.08 percent in three years, 17.64 percent in five years, and 8.94 percent in 10 years. Presently there is no tax on equity or equity related holdings that an investor has with them for more than one year.

Besides, the government says it was hopeful that the revenue on account of LTCG levy will grow substantially. Finance Secretary Hasmukh Adhia echoes the same viewpoint as he said the government hopes to double its revenue from LTCG tax on stocks to Rs 40,000 crore in 2019-20 as more share transactions come in its fold, PTI reported on Sunday.

The government has made it clear that with re-introduction of LTCG tax, the STT will remain in place and there was no plan to abolish it. Interestingly, STT was brought in after the government decided to withdraw LTCG tax. At present, a 0.001 percent STT is charged at the time of selling of mutual fund unit holdings. Besides, a 0.1 percent STT is charged at the time of buying and selling equity share units, according to this Mint report.

It may be noted that the LTCG tax has been imposed with a ‘grandfather’ clause that gives certain relaxation to the identified stock market investor. Under the norm or the grandfather rule, the government has said there will be no LTCG tax on equities held as of 31st January, 2018.

The government defends introduction of the new tax after a gap of 14 years on select equity holdings saying, “If the salaried class pays up to 30 percent income tax after toiling, it is only fair that those who make huge returns on stock market investment are brought into the tax net,” Adhia added. Adhia said a huge Rs 3.67 lakh crore, as per the I-T returns filed for Assessment Year 2017-18, has been exempted from tax as it under the LTCG from listed shares, according to PTI.

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