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Home Articles Budget 2018: How LTCG Tax Works On Equity Funds?

Budget 2018: How LTCG Tax Works On Equity Funds?

IndianMoney.com Research Team | Updated On Tuesday, March 06,2018, 05:57 PM
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Budget 2018: How LTCG Tax Works On Equity Funds?

 

 

It's been more than a year since investors rushed to invest in equity mutual funds. After demonetization, investors found mutual funds especially equity mutual funds, very attractive. With FD and small saving schemes rates falling, investors pumped money into equity mutual funds, hoping to pocket very high returns.

Many investors put money in mutual funds via SIPs. Investors pumped in a record Rs 6,222 Crores via SIPs in mutual funds. Mutual funds collected more than Rs 59,482 Crores through SIPs, between January 1st 2017 and December 31st 2017.

Finance Minister Arun Jaitley has introduced an LTCG tax of 10% on equity shares and equity-oriented mutual fund schemes, if long-term profits/gains are more than Rs 1 Lakh in FY 2018-19 (April 1st 2018 - March 31st 2019). This rule is applicable from April 1st 2018.

If you hold your investments in equity-related schemes for a year or more and make gains/profits, your profits are called long-term capital gains (LTCG). It is believed that you do not have to pay LTCG tax, if you sell all the equity mutual fund units and equity shares before 31st March 2018. This means current rules on LTCG apply.

Let's understand how LTCG tax works on equity funds and also the newly introduced grandfathering clause. Want to know more on mutual funds and investment planning? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.

 

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Budget 2018: How LTCG Tax Works On Equity Funds?

 

1. What is the grandfathering clause?

 

Grandfathering clause is an exemption granted to you and other existing investors on equity shares and equity-oriented mutual funds, on profits made till January 31st 2018. The grandfathering clause says that there will be no LTCG tax on notional profit in equity shares/mutual funds.

 

SEE ALSO: 4 Reasons To Tax Capital Gains On Shares

 

2. How LTCG Tax Works On Equity Funds?

 

Let's understand LTCG on equity shares and equity-oriented mutual funds, if they are held for over a year after April 1st 2018. Under the grandfathering clause, LTCG Tax would be calculated on the basis of the closing price of the equity share/equity mutual fund on January 31st 2018.

Let's say you have purchased an equity share on January 10th 2017 for Rs 100, which closed at Rs 200 on January 31st 2018. If sold after March 31st 2018, LTCG tax will be calculated based on the acquisition (purchase) price and the closing price on January 31st 2018, whichever is higher.

 
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If you sell this share after March 31st 2018, LTCG will be calculated as follows:

 

Case 1:

 

You bought a share on January 15th 2017: Rs 100.

The price of this share on January 31st 2018: Rs 200

The price on April 1st 2018: Rs 250

LTCG: Rs 250 - Rs 200 = Rs 50.

 

Case 2:

 

You bought a share on January 15th 2017: Rs 100.

The price of this share on January 31st 2018: Rs 50

The price on April 1st 2018: Rs 150

LTCG: Rs 150 - Rs 100 = Rs 50.

 

Case 3:

 

You bought a share on January 15th 2017: Rs 200

The price of this share on January 31st 2018: Rs 100

The price on April 1st 2018: Rs 200

LTCG: Rs 200 - Rs 200 = Nil.

 

Case 4:

 

You bought a share on January 15th 2017: Rs 100

The price of this share on January 31st 2018: Rs 200

The price on April 1st 2018: Rs 150

LTCG: Rs 150-Rs 200 = Loss of Rs 50.

LTCG is Nil.

 

Case 5:

 

You bought a share on January 15th 2017: Rs 200

The price of this share on January 31st 2018: Rs 100

The price on April 1st 2018: Rs 50

LTCG: Rs 50 - Rs 200 = Loss of Rs 150.

LTCG is Nil.

 

Case 6:

 

You bought a share on January 15th 2017: Rs 200

The price of this share on January 31st 2018: Rs 200

The price on April 1st 2018: Rs 150

LTCG : Rs 150 - Rs 200 = Loss of Rs 50.

LTCG is Nil.

 

The LTCG Tax will not affect you and retail investors. It will be a tax on the HNIs and the rich. Be Wise, Get Rich.

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