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Published on 1/02/2018 4:33:26 PM | Source: Morningstar Investment Adviser India Pvt Ltd

Equities despite the 10% LTCG still remain the most attractive asset class for the long term - Morningstar

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Below Is the View On Union Budget 2018 By Mr. Kaustubh Belapurkar, Director - Manager Research, Morningstar Investment Adviser India Pvt Ltd

Long Term Capital

Gains Tax (LTCG)  Introduction of Long Term Capital Gains Tax on Equities and Equity oriented funds was a bit of a dampener, albeit not totally unexpected as several hints had been dropped alluding to a reintroduction of LTCG for equities.  

Grandfathering of capital gains (realized or unrealized) till 31st Jan 2018, is a positive move as this should ensure there is no major knee jerk selling in the market. Although it could lead to confusion/creative accounting regarding how grandfathered gains are accounted for when actual gains are realized.

By exempting gains below 1 lakh from LTCG, ensures that the smaller investors will ending up paying minimal tax, thus in that respect retail investors shouldn’t be too spooked by this move. 

Introduction of a 10% Dividend Distribution tax (DDT) on dividend options of equity funds to bring them on par with the growth schemes. This move may impact flows into funds where investors were primarily entering with the expectation of regular dividends. Infact dividend schemes are now slightly disadvantaged as opposed to growth schemes as LTCG below 1 lakh is exempt from tax. 

In our opinion if the LTCG tax had to be tweaked, increasing the holding period from 1 year to 3 years for LTCG would have been a better option. Equities clearly are not a 1-year investment option and by increasing the holding period for LTCG eligibility would have improved holding discipline amongst investors. At the same time, investors wishing to book gains within 3 years would have paid 15% Short Term Capital Gains (STCG) Tax which would have added to tax collections.

While there will be some sentiment driven redemptions and a short-term slowdown in flows, we don’t think this move will have a massive impact on mutual fund flows in the long run. Equities, despite the 10% LTCG still remain the most attractive asset class for the long term even from a post-tax perspective. This coupled with the fact that we are still severely underpenetrated in terms of equity participation, should ensure that flows into equities and equity funds remain robust. 

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