03/02/2018

Union Budget 2018 Update and Key Highlights

The finance minister announced the union budget for the financial year 2018-2019. We
would like to highlight key points which are relevant for your personal finance.

1) The government introduced 10% tax on dividend payout by equity -oriented mutual
funds. Most of you are in a growth plan, hence this is not relevant.

2) Tax on long term capital gains (LTCG) on equity shares and equity mutual funds
exceeding one lakh per year at the rate of 10%, without allowing any indexation
benefit. However, all gains up to 31st Jan 2018 will be grand fathered.
(This is relevant for you and more on this in FAQ Section below).

3) The gains from equity mutual funds held upto one year will remain as short term
capital gains and will continue to be taxed at the rate of 15%. This is not relevant if
you sell your equity funds after 365 days.

4) The government has increased the standard deduction for salaried employees to
Rs.40000 in place of transport allowance and reimbursement of medical expenses.
You can now take standard deductions of Rs.40000 on your salary income.

5) The existing 3% cess on income tax has been replaced to 4%. You will be paying a
slightly higher tax on your income.

6) There is no change in person tax laws. All income tax slabs remains the same as
current financial year 2017-2018.

7) Senior Citizens (people aged above 60) can claim deductions upto one lakh towards
medical expenses of critical illness.

8) Senior citizen can claim exemption on interest income on deposits with banks and
post office up to Rs.50000 .TDS not required to be deducted up to Rs.50000.

9) Senior citizen can avail section 80(D) benefit up to Rs. 50000 for their health
insurance premium paid.

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10) EPF for women employees to be reduced from 12% to 8% for first three years and
no change in employer’s contribution. Not relevant for male employees.

11) Set off under sec 54 EC now only available for long term capital asset being land or
building or both and lock in period for new investments increased from three years
to five years .(This is applicable in case you have sold a land or building, otherwise
ignore)

12) Bitcoin is no longer a legal currency that can be used to exchange goods or services.

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 FAQ

Post this budget I am sure you must be having a lot of questions and we thought of
simplifying this in the form of a frequently asked questions (FAQ). Hope this answers your
queries.

Q 1) I have invested in equity mutual funds before 31 January 2018. How will my taxation
work if I withdraw now?

Ans. Any notional gains till January 31st 2018 are proposed to be exempted in calculation of
long term capital gain. Let me give you an example to understand

Let’s say you invested Rs .100000 on 4th August 2017.

As on 31st January 2018, the current value is Rs.150000. Now the capital gain on January
31st 2018 is Rs.50000 (150000-100000). This 50000 is always tax free if you sell after 365
days from initial date of purchase – 4th August 2017 as capital gains arise only above 1 lac.

Now you wish to sell on 5th August 2017 the value is Rs .250000. The total capital gain is
Rs.150000 (250000-100000) Out of these Rs .50000 is removed as it is the grandfathered tax
free position. The remaining long term capital gain (LTCG) is Rs 100000. This amount is also
tax free because the taxable equity (LTCG) should exceed Rs. One lakh.

Q.2) I will be investing in equity mutual funds after February 1st 2018. How will the tax
implication work?

Ans. Says you invest Rs. ten lacs on 3rd February 2018 and the value on 4th February 2019 is
Rs.11.5 lacs .You have made a capital gain of Rs. 1.5 lacs.

Now your tax calculation works as below.

Sale price = 11.5 Lacs
Cost price = 10.0 Lacs
Total Gain= 1.5 Lacs
Standard Exemption = 1.0 Lacs
Taxable Long term capital gain= 50000

Taxable payable (10%+ cess 4%) = 5200

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 ____________________________________

Total gain in hand = 1,44,800

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Q 3) Should I sell my existing mutual funds completely before 31 st March 2018 to avoid
any confusion is calculation of capital gain?

Ans.No, you should not do this because as per the law, whatever gains you have made up to
31st January 2018 is completely exempted from tax. Your capital gains are protected from
taxation.

Let me show you an example.

Say you have invested Rs. 10 Lacs on 15th January 2014. The value of Rs. 10 Lacs on 31st
January 2018 is Rs. 16 Lacs. Your notional gain of 6 Lacs (16 Lacs -10 Lacs) is totally
exempted from tax.

Now assume On 2nd December 2018, the value becomes 19 Lacs and you sell it. Let’s
understand the Capital gain taxation

Current Value as on 2nd December 2018 Rs .19 Lacs

Purchase Value on 15th Jan 2014 Rs.10 Lacs

Total Gain Rs. 9 Lacs

Less: Grandfathered Exempted gain Rs .6 Lacs

(I mentioned that gains up to 31st January 2018 are tax free)

Less: Standard exemption Rs. 1 Lacs

Taxable LTCG Rs. 2 Lacs

Hence there is no benefit if you sell now and buy again. The Capital gain portion upto 31 st
January 2018 IS tax free. You will only be taxed after gains accrued from 1st Feb 2018.

(4) I am doing an SIP. How will my calculation of taxes be done

Ans.Each SIP instalment is considered as a unique investment from taxation point of view.

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Therefore any SIP instalment which completes one year will be classified as long term and
gains from that installment are taxed at 10% if the gains are above Rs. One Lac in the year

(5) What will happen to my Tax saving investments (ELSS) Schemes?

Ans.The same long term capital gain rule will apply for ELSS schemes also as they are equity
oriented mutual funds.

(6) How will we get to know our capital gain calculation every year?

Ans.We at Grow wealth have software which calculates long term and short term capital
gains. We have to modify this software as per the current changed laws. We will be ready
with the capital gain calculation software before 5th April 2018. Please note, capital gain will
arise only when you sell your mutual funds in a given financial year.

(7) I am in dividend plan of mutual funds ? How will my investments get impacted?

Ans. As dividends are taxed right from one rupee, you will be taxed on your dividends. We
will get back to all of you who have dividend plans and will switch your investments to
growth plans .The rational for doing this is, dividends are taxable from one rupee of the
dividend income whereas long term capital gains are taxed after one lac of capital gain.

(8) There is a 10% LTCG on shares and equity mutual funds should I invest elsewhere

Ans.Yes, there is a 10% LTCG on equities.

But is there any better option then equity mutual fund to create wealth?

Where else can you invest?

Fixed deposit – 6.75%, taxable as per your slab, Gold 6-7%, LTCG of 20%,

Real estate – 8-9%, LTCG of 20% with indexation

Mutual funds have delivered handsomely in the last many years. They should do well in the
coming decade also.

If one is selling their equities today because of long term capital gain of 10% and moving
into traditional form of investing, then it is similar to going back from smart phones to
landlines just because data pack rates have increased.

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 Our Suggestion

(1) Do not take capital gain taxes so seriously .If equities delivered 15% returns before
the budget , you would have got 15% in hand , now you would receive 13.5% just a
small reduction in your gains . In almost all the developed countries, equities are
taxed at 10%-30% or more. We are still at lowest tax bracket.

(2) Our suggestion is that investments should be done based on investment merits and
not due to tax advantages. Equity mutual funds have the merit such as creating
wealth, beating inflation, regulated, transparent, professionally managed, liquid etc.
Make use of equity investments. They are a boon for mankind and a blessings for our
generation.

(3) Till 2004, a long term capital gains from equity was taxed either at flat 10% or 20%
with indexation. The government had given a honeymoon period of 14 years for the
capital markets to grow. Everyone knows that there is going to be a strong
performance in the stock markets in the long run due to strong economy that we
have , hence the government wants a share out of it from you. We have no choice as
we cannot control this. Let’s get adjusted to it. Our Suggestion stay invested.

(4) Focus on your financial aspirations. Segment your needs. Some goals financial goals
that you need to focus on is providing enough money for your child’s future ,
planning for their marriage , building a decent retirement corpus to get regular
income after your retirement , planning for your taxes , building a house, creating
wealth for your next generation etc
Together, we can make this possible with equities. Let’s plan a BOLD and BRIGHT
future.

Now that you are aware of the changes, what you need to do?

Nothing, just continue to stay the course as always. We assure you that our team is
well equipped with the requisite expertise and skills to render the best quality of
advice. Happy Investing.

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