Investment in stocks and MFs: Impact of budget 2018

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Taxation impacts the returns from investment. Union budget 2018 has some important provisions, which will have implications for investment in stocks and mutual funds.

Stocks

For stocks, till now, Long Term Capital Gains (gains from selling stocks after holding for a minimum of one year) have been exempted from taxation. Budget 2018 changes this. LTCGs beyond 1 lakh will be taxed at 10 % without indexation. All capital gains till 31st January 2018 will be grandfathered, that is, LTCGs till 31st January 2018 will be exempt from taxation. There are no changes in Short Term Capital Gains (STCG) tax, which will continue at 15 % and dividends from stocks up to Rs 10 lakhs a year will continue to be tax free.

Mutual funds

There are changes in taxation of mutual funds also. LTCGs from equity funds, hybrid funds (funds which invest 65 % or higher in equity) and equity savings funds were exempt from tax. Dividend from these funds was also exempt from tax. Budget 2018 removes these exemptions. LTCGs from these funds will be subject to 10 % LTCG tax. Here also, the grandfathering treatment will be available. That is, LTCGs up to 31 January 2018 will be exempt from taxation. STCGs will be taxed at 15 %. Dividends will be subject to 10 % tax.

For debt funds/ debt oriented income funds like MIPs there are no changes in taxation.

The tax structure wef 1st April 2018 for mutual funds can be summarized as follows.

Tax benefit U/S 80C for ELSS (Equity Linked Savings Scheme) continues without change.

The favorable tax treatment for equity and equity oriented mutual funds has been largely reduced by this budget. However, this is not likely to impact the flows into equity and mutual funds. Since equity out-performs other asset classes in the long-run, equity and equity-oriented funds will continue to attract funds and deliver superior returns in the long-run.

By V K Vijayakumar

Posted: February 2018

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