As an investor in equity mutual fund (MF), it is important to note that unlike in the past, the long term gains made will now be subject to tax in the year the units are sold. Whether you invest a lump sum amount or have a SIP in any equity MF, the long term gains made will be subject to tax.
However, not all gains will be taxed and not all investors may be impacted as some relaxation has been provided.
There are certain dates to keep note of while computing your tax liability on such equity investments. Let us see which are those dates and their importance.
April 1, 2018 – LTCG era begins
Any long term capital gains ( LTCG) made on transfer of equity mutual fund schemes ( or any equity investment) that have equity exposure of 65 per cent or more will have to pay a long-term capital gains tax of 10 per cent on the gains made above Rs 1 lakh a year.
The LTCG will apply not only to investments made on or after April 1 but also to your existing investments as and when you redeem after this date, subject to the grandfathering clause. The holding period considered for calculation of long term gains is 12 months, else short term capital gains will be applied.
The January 31, 2018 – Grandfathering date
LTCG made till January 31, 2018, remains grandfathered, i.e., gains will remains tax-exempt. To know the NAV as on January 31, 2018, of the MF scheme that you hold, you may visit the AMFI website.
Illustratively, if you have MF units which were purchased anytime before Jan 31, 2018, but are sold anytime after April 1, 2018, the NAV gains made till Jan 31 will be tax exempt and the NAV gains made post that date will be taxed.
For investments ( SIP or lump sum) made before January 31, 2018, but yet not redeemed, the grandfathering clause comes to the rescue. The LTCG on NAV after that date will, however, apply as and when units are sold after holding for 12 months or more.
February 1, 2018, and March 31, 2018
It’s not just investments made after April 1, 2018, that will only count towards LTCG tax but any purchase made between February 1, 2018, and March 31, 2018, and beyond will also be subjected to LTCG if the holding period condition is met.
For tax purpose, the first-in-first-out method is to be used and based on the holding period, the tax is to be calculated.
What to do
Look at your portfolio size and then decide how much will be the impact of mutual fund taxation rules. On an equity portfolio of Rs 10 lakh, comprising of equity shares and equity MF schemes, assuming annual growth of 10 per cent, the gains will be nearly Rs 1 lakh, in case you redeem and book profits.
Gains in equity markets is non-linear and may not be the same every year or may even be subject to loss. As per the new rules, gains realised up to Rs 1 lakh per financial year will still remain tax-exempt. Some industry experts suggest the harvesting approach to redeem and then re-invest as and when gains near the Rs 1 lakh limit in a year.