Long Term Capital Gains Taxes - What is Long Term Capital Gains Tax?

On Wednesday, February 1, 2018, Union Finance Minister Arun Jaitley presented his third Budget.

Save Tax
Upto ₹46,800 Under Sec 80C
Best Tax Saving Plans
  • High Returns

    Get Returns as high as 17%*
  • Zero Capital Gains tax

    unlike 10% in Mutual Funds
  • Save upto Rs 46,800

    in Tax under section 80 C

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

Get Instant Tax Receipts
Save upto ₹46,800 in Taxes Under Section 80C
View Plans
Please wait. We Are Processing..
Plans available only for people of Indian origin By clicking on "View Plans" you agree to our Privacy Policy and Terms of use #For a 55 year on investment of 20Lacs #Discount offered by insurance company Tax benefit is subject to changes in tax laws
Get Updates on WhatsApp
We are rated
58.9 million
Registered Consumers
26.4 million

Here’s the key highlight of the Budget:

“Long Term Capital Gain (LTCG) Tax on equity Mutual Funds”

Needless to say:

A large number of long term equity MF investors are miffed by the government and are confused about what they should do.

So we decided to spill the beans on LTCG tax, its impact and new investment strategy for long term equity MF investors.

So, let’s jump right in.

What is Long Term Capital Gains (LTCG) Tax?

Long Term Capital Gains (LTCG) Tax is the tax liability of a taxpayer on benefits/returns/profits gained in the long term by assets including (but not limited to) stocks/shares, share linked investment plans, and real estate.

Why has the LTCG Tax Suddenly Become So Important?

In 2004-05, long term capital gains on stocks and shares were tax exempted. However, the government of India reintroduced the LTCG tax on shares and stocks, on the 1st of February 2018. As per the new LTCG tax rules stipulated by the government, those earning profits over Rs.1 lakh from sales of shares or from investment in share-oriented products such as equity mutual funds held for one year or more will need to pay 10% tax on the overall profit.

What is the 'Grandfathering' Clause in LTCG?

‘Grandfathering’ clause protects the interest of those who have already invested in long term capital instruments such as sale of stocks or equity mutual funds as per the prevalent tax laws. LTCG’s ‘Grandfathering’ clause will provide exemption to those who have already earned profits from the sale of shares or have generated capital gains from equity mutual fund schemes before the tax comes into effect. As per the new rules, LTCG tax on profits generated from sales of shares or equity mutual fund schemes earned till the 31st of January 2018 will be exempted (grandfathered).

Who will Come Under the Radar of LTCG Tax?

According to the new rules, anyone booking profits from sales of stocks or capital gains from equity mutual fund schemes after 31st of March will have to pay LTCG taxes. This means existing investors have the option to sell their stocks till March without having to pay any taxes on the profits generated by the sale. In addition, the LTCG tax will apply only to those who will generate profits over Rs.1Lakh in a particular financial year. This means if an investor makes long-term gains of Rs.2 lakhs (in a FY), LTCG tax will apply only on Rs.1 lakh (which is over and above the Rs.1 lakh limit.)

What Should Investors Do Now?

We’re sure the introduction of LTCG tax on equity mutual fund schemes will encourage more and more investors to invest in Unit Linked Insurance Plans (ULIPs). Given the new taxes, ULIPs pose as a brilliant investment instrument that offer the triple benefits of investment, tax savings and a comprehensive insurance protection.

ULIP allow investors to invest in different capital gain options including debt and equity funds. As ULIPs are typically insurance plans, there are no taxes on the maturity benefits. But what’s really special about ULIPs is the fact that even partial withdrawals are tax exempted. Besides, those investing in ULIPs can claim tax deductions on premiums paid under Section 80C of the Indian Income Tax Act 1961.

Why are ULIPs Better than Equity Mutual Funds?

After the introduction of LTCG taxes, ULIPs have become better saving instrument as against Mutual Funds. Here are 5 key reasons why ULIPs are the better option:

    • Long-Term Investment – You probably already know that the best way to grow your wealth is by investing it for long time. But you’ll be surprised to know that for only 40% mutual fund investors, the average holding period was more than 2 years, whereas for a large majority (60%) mutual fund investors, the average holding time was less than 2 years, according to 2015 Assocham Report. On the contrary, ULIPs have a minimum lock-in period of 5 years encouraging long-term investment without having to fear for their tax liability on maturity proceeds.
    • Cost Proposition - Mutual funds attract a variety of charges including Fund Management Charges, Distribution charges, Expense Ratio and Exit Load. Remember, 60% mutual fund investments are made for 2 years or less. Furthermore, these charges are relatively higher. On the other hand, most online ULIPs have Fund Management Charges and expense ratios lower than that of Mutual funds for life cover.
    • Tax Benefits - After the LTCG tax rules come into effect, the maturity proceeds of long-term equity mutual fund schemes (1 year or more) for more than Rs.1 lakh will attract a tax liability of 10 per cent. Whereas the maturity proceeds of ULIPs are eligible for tax deduction. Besides this, tax exemption is also allowed on partial withdrawals. In addition to that, the premium payment for ULIPs is eligible for tax deduction under Section 80C.
    • Protection – Mutual funds are pure investment instruments and do not offer any protection to the investors in case of an emergency. Contrarily, ULIPs offer the triple benefits of insurance protection, investment and tax savings to investors.
    • Fund Switching Option – Mutual funds allow investors to switch funds amongst the different available schemes. However, this option comes with a break in investment period. ULIPs are much more flexible as compared to mutual funds. ULIP investors can easily switch between equity to debt funds.

Over to You!

So there you have it – the what, why and how of LTCG taxes. The trend that seems clear, at this point, is that equity mutual funds will lose out on the popularity polls and ULIPs will take the centre stage in the months to come. But one thing that we’re sure of is the fact that more awesomeness is set to prevail in the Indian Life Insurance Industry.

May we see bigger, better investment opportunities from 2018 and beyond!

Read More: Capital Gains Tax

Maximise your
Tax Savings!
  • Tax savings under Sec 80c
  • Get Instant Tax receipt
  • Tax free returns upto 18%
View plans
Standard T & C Apply*
Double tax benefit
Save Tax Under Section 80C
Save Tax Under Section 80C

Income Tax articles

Recent Articles
Popular Articles
Income Tax Calculator for Housewife

07 Feb 2023

In India, housewives are eligible to pay income tax on their
Read more
HRA Exemption

19 Jan 2023

HRA refers to House Rent Allowances, which an employer provides
Read more
15 Best Tax Saving Schemes in India

19 Jan 2023

It is essential to save tax to plan an investment scheme
Read more
How to Make SIP Investment Under 80C?

02 Dec 2022

A systematic Investment Plan (SIP) is an investment tool that
Read more
Income Tax Above 10 Lakh

10 Jun 2022

On 1st February 2023, the Government of India announced the
Read more
Tax Saving Investments
Tax Saving Investments Tax Saving Investments are an integral part of one’s life as they offer tax deductions
Read more
Income Tax Above 5 Lakh
Income tax is the tax levied on the income earned by an individual through any source and hence is taxable in the
Read more
Income Tax Above 15 Lakh
Annual income tax payment is a big concern for individuals, especially the salaried class, who commence tax
Read more
Income Tax Above 10 Lakh
On 1st February 2023, the Government of India announced the Union Budget 2023, wherein the new income tax regime
Read more
Gratuity Eligibility Before and After Completion of 5 Years
An employee is a person who is hired by an organization to work in a specific field that they have expertise in
Read more

Download the Policybazaar app
to manage all your insurance needs.