LTCG tax on equities not only makes gains taxable, but makes their funds inaccessible for old investors

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Updated: August 10, 2019 12:57:38 PM

LTCG tax of 10 per cent is now charged on gains in excess of Rs 1 lakh generated from redemption of equities and equity-orient funds taken together in a financial year.

mutual fund, MF, equity investment, equity-oriented funds, long-term capital gain, LTCG, income tax, LTCG tax, capital gain tax, redemption, PAN, KYCAsset Management Companies (AMCs) has stopped redemption process from folios where valid PAN is not updated.

With the long-term capital gains (LTCG) on equities and equity-oriented investments becoming taxable, PAN has become a must to continue with such investments. Following a circular from market regulator Securities and Exchange Board of India (SEBI), dated July 30, 2019, which states that redemption transactions are getting processed for non-PAN exempt existing folios without getting PAN details – which is not in line with various SEBI Circulars – Asset Management Companies (AMCs) have stopped redemption process from folios where valid PAN is not updated.

LTCG tax of 10 per cent is now charged on gains in excess of Rs 1 lakh generated from redemption of equities and equity-orient funds taken together in a financial year.

However, PAN was made a KYC requirement around the year 2000 and it was not mandatory before that. For example, people who invested in the erstwhile Morgan Stanley Funds didn’t provide PAN while investing, but if they now approach HDFC AMC, which is now managing the Morgan Stanley Funds, for redemption, their request will only be processed after updating the KYC by providing valid PAN.

Some mutual fund (MF) distributors question prudence of such guidelines as many investors may have changed their addresses or even moved to other countries and it is very difficult to trace them to update their KYC. Moreover, when mentioning of PAN was not mandatory at the time of investment, instead of putting bar on redemption, a deadline may be set to provide PAN details to continue with the investments, or the funds should be redeemed automatically.

However, other argues that funds may be redeemed only on request of the investors and taxability of LTCG on equities make mentioning of PAN necessary.

Although it may be difficult to locate investors who have changed their address or even cities, but it would not be impossible to update KYC for them if they are still in India as almost everybody now has PAN and/or Aadhaar. Such investors may even update their KYC themselves, when they approach respective AMCs for redemption.

However, investors, who have moved out of India may not have either PAN or Aadhaar or both. If such investors, without valid PAN, want to redeem their funds during their visit to India, may face problems as it may not be possible for them to get the PAN issued and get the KYC updated during their stay in India.

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