No capital gains on equity plans, dividend tax at 5%

Written by fe Bureaus | Mumbai | Updated: Sep 1 2010, 04:58am hrs
Its a mixed bag for equity investors from the new Direct Tax Code that was tabled in Parliament on Monday. This is because there would be no long-term capital gains taxes for equity products including mutual funds. Earlier, there was a proposal to levy a capital gains tax on it as well. Currently, there are no such taxes. What came as a disappointment though is the 5% dividend tax that would get levied on equity schemes and equity approved unit linked insurance plans. Earlier, there were no such taxes for equity schemes.

For the purpose of capital gains tax calculations, any investment above one year is construed as long-term and equity-oriented schemes are defined as those with an average equity exposure of more than 65% in a year. By that logic, many balanced schemes also qualify for exemption from paying long-term capital gains tax.

Ved Prakash Chaturvedi, MD at Tata Asset Management said, Equity fund investor now will have to pay tax on equity fund dividends which is a disappointment. He added that since the investors would have time (DTC will be implemented from the financial year 2012-13), it is likely to smoothen the impact. Suresh Soni, CEO of Deutsche Mutual Fund says, over the short-term it could affect investor sentiments but not over the long-term. It is however likely that dividend options might lose its sheen. Systematic Withdrawal Plans (SWPs) in a growth plan could work out better than dividend options on a post -tax basis over the long term said a financial planner on condition of anonymity.

As regards the short-term capital gains tax - gains made from investments within a year or less there is likely to be no impact. From April 1, 2012, it would be linked to the income tax slab rate of the investor. Today, a 15% tax is paid on short-term capital gains from investing in an equity product. Surcharge and education cess are additionally charged to that. From 2012, the short-term gains would be added to the overall income of the individual for calculation of tax. At the higher end, it works out to a similar tax rate of 15%, which is similar to the earlier tax rate. A senior executive of an institutional broking house said, Though prima facie it appears attractive for retail and other domestic investors, there is a possibility that investors will end up paying much more than what they are currently paying.