Get ready for LTCG tax on equity funds

The tax efficiency feature in mutual fund investments stands reduced post Thursday's Union Budget announcement. The finance minister Arun Jaitley has introduced the long-term capital gain tax on equity/equity-related instruments on the gains over and above Rs. 1 lakh at 10 percent without the indexation benefit.

Currently, the equity fund is tax-free, if a person holds the fund for more than a year. However, if the investor exits it before 1 year then they attract STCG (short term capital gain tax) of 15% on the returns. FM also declared that all the gains earned upto January 31, 2018 are grandfathered. That is investor will pay the tax on the gain ahead of January 31, 2018.

Obviously, with this announcement many investors and specifically new investors may rethink on their investment in equity funds, thereby it may be possible that the record inflows to equity mutual fund industry may see a dip. For many investors, the main motive behind mutual fund investment was tax efficiency. However, taking investment decision with this in mind would prove counterproductive. Equity investments have higher potential to grow investors money in a longer run and are still the attractive investment avenues.