Here is how the Union Budget 2018 will impact your mutual funds.
Equity Mutual Funds
Long-Term Capital Gains Tax
From 1st April 2018, you will have to pay a 10% long-term capital gains tax on your stocks and mutual funds held for one year and above. Here is how capital gains tax on equity works:
Old Tax Rate
New Tax Rate
Less than one year
One year and above
No indexation benefit is given to equity investments unlike say debt mutual funds or real estate.
However the gains you have made on your stocks and funds till January 31st, 2018 will be exempted from this tax. This rule is known as ‘grandfathering.’
You purchased an equity fund on 1st May 2017. You buy price was Rs 100.
On 31st Jan 2018, its value was Rs 120.
You sell the fund on 1st November 2018 (1.5 years after purchase).
Your sale price is Rs 150.
You will have to pay 10% of the gain from 31st Jan to the selling date. Your taxable gain is 150-120 = 30. Hence your tax will be 10% of 30 which is Rs 3.
Dividend distribution tax
From 1st April 2018, equity mutual funds will pay a dividend distribution tax of 10% on equity dividends distributed by them. This was previously zero. Note that the tax will reduce your returns but will be paid by the fund and not you.
Debt Mutual Funds
Capital Gain Tax
There is no change in the taxation of debt mutual funds. This is as follows:
Less than three years
As per slab rate
Three years and above
20% with indexation
Indexation takes inflation into account while computing your gain. Let’s take an example.
You purchased a debt fund on 1st May 2015. Your buy price was Rs 100.
You sell it on 1st November 2018 (3.5 years after purchase). Your sale price is Rs 150.
In the meantime say the Cost Inflation Index has gone up from 254 to 283. This will increase your buy price for tax purposes (283/254*100) to Rs 111.41.
As a result, your taxable gain is 38.59. You pay 20% on this gain, which comes to Rs 7.71.
Thus your effective tax rate is 8.34/50 = 15.4%.
Dividend Distribution Tax for debt funds
This has not been changed for debt funds. The dividend distribution tax on debt funds is 28.84%.