The 2018-19 Budget and Impact on Mutual Funds

The Union Budget 2018-19 has a lot of new initiatives announced today, which have an overall positive undertone. Various provisions carry a variable impact on populace and businesses. One of the most talked about the initiative is the tax restructuring.

The Budget re-introduced (after abolishing in 2005) a tax on long-term capital gains on listed equities. The LTCG of over Rs1 lakh will be taxed @ 10% without the benefit of indexation. The capital gains made before Jan. 31, 2018 will be exempt.

The existing short-term capital gains taxed @15% remains unchanged.

Additionally, a 10% tax has also been announced on the distributed income by mutual funds earned on equity schemes.

This modest change in the tax regime will produce a marginal revenue of Rs20,000 crore in 2018-19.

Impact on Mutual Funds

Equity Funds:

  • LTCG
  • LTCG gains made are up to 31 Jan 2018. This will be highest price of the stock/fund scheme on 31 Jan 2018 minus the cost of acquiring stock.
  • LTCG gains are made after 31 Jan 2018. This will be sale price minus the highest price of the stock on 31 Jan 2018.
Fund NAV Scene 1 Scene 2 Scene 3
Bought long ago @100100100
Price on 31-01-1850012080
Sale Price600 11090
Presumed Purchase Price500110100
Capital Gain1000-10


Scene 1 – Price on 31 Jan 2018 is higher than actual purchase price

Scene 2 – Selling price lower than 31 Jan 2018, but greater than purchase price, so selling price is the purchase price

Scene 3 – Purchase price is higher than 31 Jan 2018, so it remains the purchase price.

(1)    Growth vs Dividend The new tax structure will encourage investors to choose “growth” option in the equity/equity oriented funds (balanced funds, equity advantage funds etc) as opposed to “dividend” option.

(2)    Increased Churning With a mere 5% difference between short-term and long-term gains taxation, it would be fair to assume heightened short-term trading activity in direct share trading, and even in some cases, in equity mutual funds. Serious investors with the clear long-term horizon in mind will keep their investments for long term.

Debt Funds:

Greater sops offered to senior citizens (50,000 versus 10,000) will encourage this segment of investors to increase their FD allocation at the cost of debt funds.

Considering the fact that many countries – developed as well as developing – have had successful capital gains tax regimes with a meaningful degree of compliance at a much higher rate, Indian investor will not see a marginal sacrifice of his gains as a deterrent to equity investment.

Short-Term Impact Minimal, Long-Term Impact Positive:

Understandably, a knee-jerk reaction in the market in the immediate term is not unexpected as the mid and small cap stocks were already long in the tooth and were in a corrective phase.

But, with buoyant equity markets globally, Indian investor’s appetite for equity/debt mutual funds may not have any material impact due to the following positives in the Budget. These should stabilize the fiscal budget, support stronger GDP, create employment, enhance net household savings and improve corporate earnings.

Another key announcement in the budget include:

– The government today increased the disinvestment target to Rs 80,000 crore for the financial year 2018-19, higher by over 10 percent year-on-year from the current year’s target.

– 100% tax rebate for farmer producer companies having a turnover of Rs.100 crore

– Proposed 25% corporate tax rate for companies with turnover up to Rs 250 crore

– Deduction on Health Insurance for senior citizens under the IT section 80D increased to Rs 50,000 from Rs 30,000.

– Exemption on interest income from 10K to 15k, no TDS from this for senior citizens.

– Deduction u/s 80DDB to be increased to Rs. 1,00,000 for all senior citizens.

– Exemption of interest income annually earned from deposit in banks and post offices to increase from Rs 10,000 to Rs 50,000

– This year’s Budget will put effort on strengthening the agricultural and rural economy, taking care of senior citizen and improving the quality of education in the country.

– India broke in top 100 brackets for the first time in ease of doing business. FDI has gone up and now it is easier to do business in India.

– Allocation for food processing increased from Rs 715 cr in 2017-18 to Rs 1400 cr in 2018-19.

– India’s agriculture exports potential is as high as 100 million dollars as against the current 30 million dollars.

– Setting up of fishery and aquaculture infrastructure development fund with 10000crs for its development.

– Launching of ‘Revitalising Infrastructure and Systems in Education by 2022 RISE – Revitalising Infra and Systems in Education by 2022 – 1,00,000 Crores.

– Govt. to contribute 12% of EPF contribution for new employees in all sectors.

– 99 cities selected under smart city mission, to be allocated 2.04 lakh crore.

– Exports seen growing at 15 percent 2017-18, says Arun Jaitley.

– PSU bank recap will allow banks to give additional lending of Rs 5 lakh crore

India is now a $2.3 trillion economy – will become the world’s fifth largest economy soon. We are on course to achieve a growth rate of 8% plus. With overall better fiscal conditions, better infrastructure, greater financial inclusion, digitization and stronger average household financial status, mutual funds are expected to remain one of the mainstays of participating in the prosperity of India’s financial markets. The 2018-19 Union Budget has overall more positives than a few minor negative surprises, hence should be considered as investor friendly.



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