Thursday, January 26, 2023
HomeMutual FundWill we pay more tax for equity MFs than debt MFs in...

Will we pay more tax for equity MFs than debt MFs in future?


From April 1st 2018, long term capital gains on stocks and equity mutual funds over Rs. one lakh have been taxed at the rate of 10% (plus 4% education cess) without indexation benefits.

P V Subramanyam of subramoney recently pointed out to me that we will be paying more tax on equity mutual fund gains in a few years than debt (or non-equity MF) gains. He suggested that I compute this scenario to know when this would happen. Long-term readers may know that I have often made calculators suggested by Subra, culminating in our book, You can be rich too with goal-based investing. The calculators part of this book is now available on SEBI’s investor education website.

Subra’s logic is as follows. The tax rate on equity mutual funds is a flat 10%. Soon the Rs. one lakh tax-free limit would be breached, and the tax will kick in. Non-equity mutual funds (any fund that does not invest in 65% or more of Indian stocks or Indian ETFs) benefit from indexation.

That is, the capital gain will not be computed as the sale price minus the purchase price (as is the case for equity funds). It is computed as the sale price minus the indexed purchase price.

That is, we inflate the purchase price using the cost inflation indexation to the year of sale. In other words, we ask if we had purchased those non-equity funds units today (when we are going to sell), how much would the purchase price increase due to inflation? A detailed example is here: Taxation of international mutual funds explained with an example.

Subra argues that indexation-benefit can be immense over time. Even though the tax rate of non-equity funds is 20% (plus a 4% education cess), the tax is applied to the indexed capital gain. Therefore the effective tax rate reduces well below 20%.

If we assume equity outperforms debt over the long term, the tax on equity can be higher than on non-equity funds.

Consider an Rs. 1 lakh purchase in equity and non-equity funds simultaneously. Assume that the equity return is 10% and the non-equity fund return is 7% (we shall assume it is a debt fund). We also assume that the cost inflation increases yearly at an average rate of about 5%.

For these assumptions, after 12 years, the tax on equity is higher than the tax on the debt fund, as shown below. The chart starts from three years as we compare equity LTCG taxation with non-equity LTCG taxation.

Equity LTCG tax vs non-equity LTCG tax comparison

This is why Subra argues that we need indexation benefits for equity as well. The Rs. one lakh tax-free limit will not matter much if our gains are much higher. Over time the tax on this will increase compared to the non-equity LTCG tax, which comes with indexation benefits. Let us hope the government introduces indexation benefits for equity LTCG as well.

The calculator used to create the above graph is part of the freefincal investor circle. You can join the investor circle to get lifetime access to several unique tools, discussion forums, and bug fixes.

Do share this article with your friends using the buttons below.


🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥


Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!


  • Follow us on Google News.
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Join our YouTube Community and explore more than 1000 videos!
  • Have a question? Subscribe to our newsletter with this form.
  • Hit ‘reply’ to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

 


Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.


  Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.


Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   


Our new book for kids: “Chinchu gets a superpower!” is now available!

Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.

Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!

Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!

Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun.

Buy the book: Chinchu gets a superpower for your child!


How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!


Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!


We publish monthly mutual fund screeners and momentum, low volatility stock screeners.


About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)


Connect with us on social media


Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.


Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.


Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)


 



RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

- Advertisment -
Google search engine

Most Popular

Recent Comments