Investors to pay 10% tax on distributed income from equity MFs

New Delhi, February 1

Investors will have to pay 10 per cent tax on distributed income from equity-oriented mutual funds, as per the Budget proposals announced on Thursday.

While unveiling the Budget proposals for 2018-19, Finance Minister Arun Jaitley also proposed to introduce 10 per cent tax on long-term capital gains from stock markets, exceeding Rs 1 lakh.

Experts opine that overall investor sentiment will take a hit with these measures, especially since mutual funds have recently emerged as a key route to invest in stock markets.

“Sentiments may get impacted (with the introduction of long-term capital gain tax) as mutual funds have been gaining traction among investors as route to invest in stock markets,” HDFC AMC Chairman Deepak Parkeh said.

Kaustubh Belapurkar Director (Manager Research) at Morningstar Investment Adviser India, however, said there will be some sentiment-driven redemptions and a short-term slowdown in flows due to the introduction of LTCG (long-term capital gains) but this move will not have a massive impact on mutual fund flows in the long run.

Domestic mutual funds had pumped in a staggering over Rs 1 lakh crore in the stock market last year, much higher than over Rs 48,000 crore infused in 2016 and more than Rs 70,000 crore invested during 2015.

In fact, the investment by mutual funds in equities has outshone those by foreign portfolio investors (FPIs) in past few years.

Besides, the finance minister has proposed to provide similar tax regime as available to equity oriented funds to Fund of Funds investing only in exchange traded funds which only invest in listed equity shares of domestic companies.

With a view to providing a level-playing field between growth-oriented funds and dividend paying funds, in the wake of new capital gains tax regime for unit holders of equity oriented MFs, it has been proposed to amend the rules to provide that where any income is distributed by an equity mutual fund then the fund would be liable to pay additional income tax at the rate of ten per cent on income so distributed, according to the Budget proposal.

This amendment will take effect from April 1, 2018.

Bajaj Capital CEO Rahul Parikh said the imposition of dividend distribution tax on equity mutual funds should be seen as a measure to bring parity between growth and dividend options of equity mutual fund schemes and is unlikely to be a negative.

“Fund houses have to realign the distribution strategy, dividend stripping may get controlled while for the investors may end up paying tax even in the short term,” Quantum Mutual Fund CEO Jimmy Patel said.

The finance minister further said the returns from the stock market are quite attracting and it was the time to bring them under the ambit of capital gains tax.

However, observing that a vibrant equity market is essential for economic growth, he said, “I propose only a modest change in the present regime. I propose to tax such long-term capital gains exceeding Rs 1 lakh at the rate of 10 per cent without allowing the benefit of any indexation.”       

He further said all gains up to January 31, 2018 from sale of equity will be grandfathered.

At present, gains from sale of equity after one year were exempt from capital gains tax.

This is in addition to the Securities Transaction Tax (STT) levied on transaction in shares, bonds, debentures, and derivatives units. — PTI