Tax Impact of Budget Provisions 2018 on Mutual Funds

#Capitalgaintax  #dividendtax  #wealthdistributiontax  #budget2018  #balancedfunds  #mutualfundssahihai

There are certain amendments proposed in the union budget FY 18-19 with respect to investments in equity and equity oriented mutual funds. Find below the summarized note on each of the important point.

A) Updated Tax Structure:

Long Term

Tax Applicability
Equity Oriented
/ Arbitrage
/ Balance - Aggressive
1 years15%10% over Rs.1 Lakh *
(without indexation)
10% + 12% Surcharge + 4% cess = 11.648%
Debt Oriented
Liquid / Money Market
/ Balance - Conservative
3 yearsAs per Tax Slab20% after indexation25% + 12% Surcharge + 4% cess
= 29.12%

Additional: Health & Education Cess of 4% + Surcharge based on total income applicable to Capital Gains.

* Cost as per fair market value / grandfathered upto 31st January, 2018.

B) Long Term Capital Gains (LTCGs)

The recent budget provisions have created some confusion in the minds of investors regarding taxability of mutual funds units, especially for equity oriented funds. Here is the some clarification for same.


Any Long Term Capital Gains (LTCG) over Rs 100,000 per year on Equity Mutual funds will now be taxed at 10%. All gains until January 31, 2018 have been “grandfathered”. So one can now assume that the new cost of holding your Equity Mutual Funds is the closing price on January 31, 2018. The start date of your holding remains the original purchase date for calculation of holding period.


Since the budget provisions are effective from 1st April, 2018, any transaction taking place till 31st March 2018 will continue to enjoy the existing taxation provisions. Thus, there would not be any LTCG (applicable on any sale happening on or till 31st March.


The grandfathering is a simple concept wherein the Finance Minister has given exemption of all notional Capital Gains earned till 31st January 2018. This means that for calculation of LTCGs, all gains made till this date will be exempted and not counted. As explained earlier, the tax computation will only be applicable by this method if the sale date is on or after 1st April, 2018 when the budgetary provisions come into effect.

Calculation for STCG:

The scenario for STCG calculation effectively remains the same as is currently in effect. The tax rate of 15% will continue be applicable if the sale happens within 365 days of purchase of the equities / units.

Calculation for LTCG:

For LTCG, the following is the calculation method:

Purchase price is to be considered higher of (a) and (b). (the idea is that only gains made after 31st Jan is taxable) .

  • a) Actual purchase price
  • b) Lower of …
  • i) Fair market value (it is the highest price /market value as on 31stJanuary, 2018)
  • ii) Full value of consideration (it is the actual sale price).



  1. Actual purchase price = 100. Market value on 31.01.18= 110. Sale price = 90. Then Fair purchase price = 100.
  2. Actual purchase price = 100. Market value on 31.01.18 = 110. Sale price = 120. Then Fair purchase price = 110.


Exemption of Rs.1 Lakh:

Next, for calculation of final LTCG amount applicable to taxation, the exemption of Rs.1 lakh is applied. Thus if LTCG as per above is say Rs.1,20,000 then 10% on only Rs.20,000 = Rs.2,000 only would be appliable.

This is applicable irrespective of any purchase date and any amount of capital gains and is effective any sale made on or from 1st April 2018. For any sale date before that, LTCG is not applicable so the exemption amount is immaterial.

 Case 1Case 2Case 3Case 4Case 5
Purchase date:15. Jan. 201815. Jan. 20181. May. 20173. Mar. 201815. Jan. 2017
Purchase Price:1,00,0001,00,0001,00,0001,00,0001,00,000
Value as on 31st Jan. '18:1,20,0001,20,0001,75,000NA1,20,000
Sale Date:25. Jun. 201925. Jun. 20192. Apr. 20182. June. 201925. Mar. 2018
Sale Value:2,00,0003,00,0001,50,0001,60,0003,00,000
Fair Purchase Price:1,20,0001,20,0001,00,0001,00,0001,20,000
Capital Gains on Sale:80,0001,80,00050,00060,0001,80,000
STCG TaxNANA7,500 (15%)NANA
(Less than Rs.1 L)
(on 1.8L - 1L)
(LTCG < 1L)
No tax payable as the amendment is with effect from 01.04.2018

This is the clarification available till now. There are still more clarifications awaited which shall be received in days to come.

C) Dividend Taxation:

Dividends on Equity oriented Mutual funds now taxed at 10%. This provision had to come into effect since LTCG tax @10% is also imposed. Not doing so would have left a window to avoid LTCG tax by switching to dividend options.

This change will also be effective from 01 April 2018.

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