How to compute LTCG on mutual funds? We explain you in 3 easy charts

By Kunal Bajaj

The Finance Bill, 2018 has introduced two major tax changes to Equity Mutual Funds — 10 per cent tax on Long Term Capital Gains above Rs 100,000; and 10 per cent Dividend Tax.

ONE: Equity Mutual Funds bought on or before January 31, 2018

Any notional long term gains until January 31, 2018 have been “grandfathered” or exempted while calculating for long-term capital gains. So you can assume the new cost of holding your Equity Mutual Funds is the closing price on January 31, 2018.

Don’t forget that the exemption of Rs 100,000 applies to all your equity capital gains — across stocks and equity mutual funds and not just investment in one scheme.

TWO: Equity Mutual Funds bought on or after February 1, 2018

Short-term capital gains stay taxed at 15 per cent, while you pay long-term capital gains on amounts greater than Rs 100,000 in a financial year.

THREE: Debt Mutual Funds

There is no change to the taxation of debt and liquid mutual funds. You need to hold them for three years to be considered long-term, and you get the benefit of indexation when calculating your new cost.

Indexation considers rise in inflation between the year in which you purchased the debt fund units and the year when you sold them — it allows the tax on debt fund gains to come down significantly.

What are Equity Oriented Funds?

The Income-tax Act defines Equity and Equity Oriented Mutual Funds as those investing in a minimum of 65% in Indian listed stocks.

Categories such as Large-cap, Small and Mid-cap, Flexi/Multi-cap, Tax Saving (ELSS), Arbitrage, Balanced, and Equity Income funds are counted as Equity Oriented for tax purposes.

So funds that primarily invest in International Equities are not considered as Equity Oriented for tax purposes.

Which investment option should you now choose — Growth or Dividend?

Our simple rule is: When in doubt, always pick Growth.

(The author is Founder & CEO of Clearfunds.com)