InvestorQ : Can you explain the finer points of the announcement made in the 2018 budget about taxation of long term capital gains on equities?
Nishant Chandani made post

Can you explain the finer points of the announcement made in the 2018 budget about taxation of long term capital gains on equities?

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Abhi Yadav answered.
2 years ago
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In the Union Budget 2018, the government of India introduced a new provision wherein equities and equity funds will also be taxed at a flat rate of 10% on their long term capital gains. Remember, LTCG on equity funds was tax free in the hands of the investor till the fiscal year 2017-18 i.e. up to March 2018. This tax is applicable only for assets sold after April 01st 2018. Here are some of the key provisions that the 2018 Union Budget had put forth and why it is important for investors:

Long term capital gains (LTCG) on equities and equity funds will be taxed in the hands of the investor in the year the gains are realized. While LTCG up to Rs.1 lakh per year will be exempt, any gains beyond that will be taxed at a flat rate of 10%. The exemption is available for each financial year up to Rs.1 lakh on all equity assets.

The important point to note here is that the tax on LTCG is a flat tax which means that the benefit of indexation is not available. This is particularly relevant when equity fund are held over a longer time frame. Hence either you can look at phasing or you can look at structuring it into a SWP for gradual withdrawal.

Union Budget 2018, apart from taxing LTCG, has also imposed dividend distribution tax (DDT) on equity funds. When a fund pays out dividend, it will deduct 10% DDT plus surcharge and cess and only pay out the net amount. This is to put equity funds at par with equities which attract tax at 10% in the hands of the investor when the annual dividend exceeds Rs.10 lakhs. This also makes a case for mutual fund investors not to arbitrage between dividend plans and growth plans of mutual funds.

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