Investors should brace for slightly lower returns from Equity/Balance funds (Aggressive equity) schemes due to taxation on long Term gains proposed under Finance Bill 2018. Further investors who opt for dividend option face an additional 10% dividend distribution Tax in equity/balanced(>65%equity exposure) schemes. In recent times Equity oriented balanced mutual funds have seen the largest inflows due to favorable tax treatment and booming equity markets. Arbitrage Funds have also found favour with High Net worth investors.
The new tax rates applicable to Mutual Fund investments are indicated below:
| Years to Qualify as Long Term | Tax on Long Term Gains | Tax on Dividends# | |
| Liquid / Money Market Funds | 3 Years | 20% with Indexation Benefit | 25%* |
| Debt Funds | 3 Years | 20% with Indexation Benefit | 25%* |
| Arbitrage Fund | 1 Years | 10% Flat | 10%** |
| Equity Funds (Inlcuding ELSS) | 1 Years | 10% Flat | 10%** |
| Balanced Funds (Aggressive Equity) | 1 Years | 10% Flat | 10%** |
| Hybrid Funds (Conservative) / MIP Funds | 3 Years | 20% with Indexation Benefit | 25% |
| * No Change in Budget | |||
| ** Change in Budget from Nil | |||
| # 1) 25% tax amounts to 25%+12% surcharge + 4% cess= 29.12% 2) 10% tax amounts to 10%+12% Surcharge+ 4% cess= 11.65% |
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Though Investors do not have much of a choice this could slightly impact inflows to Mutual funds in the long run. Apart from balanced funds, Arbitrage funds have also witnessed considerable inflows in recent times due to 6-7% tax free returns after one year holding. This category of fund stands to be affected the most as their advantage vis-a-vis debt funds will diminish.
Standard disclaimer: I am not a SEBI registered analyst / Mutual Fund expert and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk and above information is prone to error.