FM Nirmala Sitaraman has presented her maiden budget on 5 July 2019.
Read the highlights here.
In case you are a mutual fund enthusiast, this budget has got a lot for you. Investment in equity funds may change after the amendment made by the union government in its Budget in 2018.
The long-term capital gains (LTCG) on the sale of listed equity shares have been made taxable from 1 April 2018.
In the case of equity investing, long-term means a holding period of more than one year from the date of purchase. Long term capital gains are the profit earned on the sale of listed equity shares.
Before the Budget 2018 was launched, LTCG earned on the sale of equity shares was tax-free in the hands of investors. Such equity shares had already been subject to Securities Transaction Tax (STT).
It means that when you sold the equity shares after holding them for more than a year, the capital gains were exempt from tax. Only the short-term capital gains were taxed at a rate of 15%.
The objective behind keeping LTCG tax-free had been to increase the participation of investors in equity markets in India.
Owing to the exemption, the investors had started perceiving equities as a favourable investment vehicle. The number of mutual fund portfolios increased by 1.37 crore to stand at 6.65 crore in 2017.
However, the latest proposal of the finance ministry in the union budget can influence the perception of future investors.
Now, the LTCG over Rs 1 lakh on listed equity shares will be taxable at the rate of 10% without the benefit of indexation.
As LTCG was exempt earlier, indexation was out of the question. Inflation does not affect the investment with a period of just a year. Hence, the indexation benefit has not been allowed.
Don’t let the tax on LTCG fret you because there is still a relief. The long-term capital gains earned before 31 January 2018 will not be subject to taxation.
Suppose you bought an equity share of Rs 100 on 1 January 2016. You sold the share on 1 January 2018 for Rs 150. The long-term capital gain of Rs 50 (Rs 150-Rs 100) will remain tax-free in your hands because it was earned before 31 January 2018.
The Sensex turned red to this amendment by plunging 463 points to the day’s low of Rs 35,501.74. The retail investors didn’t seem pleased by the government’s move.
As regards the taxation of short-term capital gains (STCG), there have been no modifications. When you sell the equity share within one year from the date of purchase, you earn short-term capital gains. These will continue to be taxed at a rate of 15%.
Even the equity mutual funds have not been spared from taxation. A dividend distribution tax (DDT) at the rate of 10% has been proposed on equity-oriented mutual funds.
However, the dividend will not be taxed in the hands of investors. However, the DDT might reduce their return on equity funds.
In order to create a level playing field for growth and dividend-oriented scheme, such an amendment has been proposed. This move might also persuade the investor to relook his investment strategy. Investors who were dependent on dividends as a source of income seems to be the most affected.
Equities have always been considered as the favourable haven for wealth accumulation. This DDT should not stop you from placing bets in equity-oriented funds. The best route will be to opt for growth option instead of going for the dividend option.