I invested Rs 45,000 in SBI Infrastructure Fund in 2007. Will there be LTCG tax if I redeem now?

 Ashok Jamwadikar invested Rs 45,000 in SBI Infrastructure Fund – Regular Plan – Growth on July 6, 2007. He purchased 4500 units of the fund at Rs 10 each. The NAV of the fund has increased to Rs 35.3075 as of 30 September 2023 and the total value of Ashok’s investment has reached Rs 158,884.

In an email sent to FE Money, Ashok asked whether he would be liable to pay LTCG tax if he redeems his investment. Further, he wanted to know how much LTCG tax he would have to pay and whether he could redeem the units partly or not.

In India, LTCG tax is applicable to investments in equity-oriented mutual funds, including the one mentioned in the above query. However, the tax implications depend on the holding period and the amount of gains.

As the holding period in the above case is more than 1 year, it will be considered as LTCG. The important fact here is the inclusion of “Grandfathering Provisions” at the time of calculating Tax.

In the context of equity-oriented mutual funds in India, “grandfathering provisions” refer to a special rule that was introduced to protect existing investors from the imposition of long-term capital gains (LTCG) tax when the tax regime for equity investments changed.

The concept of grandfathering provisions came into play with the introduction of LTCG tax on equity investments in the Union Budget of 2018.

Grandfathering essentially means that the gains accrued up to a specified date, known as the “grandfathering date,” are exempt from the new LTCG tax. Investors are taxed only on the gains made after the grandfathering date. The grandfathering date was set at January 31, 2018.

In the above case, “Grandfathering Provisions” will be applicable as the purchase date was 6th July 2007, which is before 31st January 2018.

How much LTCG tax do you have to pay?

The LTCG tax calculation is relatively straightforward. In the case of equity mutual funds, gains from investments held for more than one year are considered long-term gains. For such gains, a flat tax rate of 10% applies on the excess gains exceeding Rs.1 lakh.

But in the above case, the provisions of grandfathering are applicable. Therefore, the maths is a little bit complicated.

Scenario 1 (no applicable to Ashok’s case): In our example, if the purchase date had been after January 31, 2018, the calculation for LTCG tax would have been more straightforward. The total investment of Rs. 45,000 has grown to Rs. 158,884, resulting in a gain of Rs. 113,884. Since the gains exceed Rs. 1 lakh, a 10% tax is applicable on the excess amount, which is Rs. 113,884 – Rs. 1,00,000, equaling Rs. 13,884. To calculate the LTCG tax, you simply multiply this excess amount by the tax rate of 10%:

LTCG Tax = Excess Gains × Tax Rate

LTCG Tax = Rs. 13,884 × 0.10 = Rs. 1,388.40

Therefore, in this scenario, the investor would be required to pay Rs. 1,388.40 as LTCG tax on their mutual fund gains.

Scenario 2 (applicable to Ashok’s case): Now, let’s include the calculation of the grandfathering provision in the example. We’ll assume that the Fair Market Value (FMV) per unit on the grandfathering date (January 31, 2018) is Rs. 16.66. Here’s how the calculation would look:

The calculation for the capital gains tax is done as follows:

  • First, determine the “Cost of acquisition,” compare the lower of the FMV on January 31, 2018 (Rs. 74,970) and the Sale Price (Rs. 1,58,883.75). In this case, the FMV on January 31, 2018, has a lower value.
  • Now you determine, which is the higher of the actual purchase cost (Rs. 45,000) and the FMV on January 31, 2018 (Rs. 74,970). In this case, the FMV on January 31, 2018, has a higher value.
  • Then, you calculate the capital gain by subtracting the cost of acquisition from the sales price. This is given by Rs. 158,883.75 (Sales Price) – Rs. 74,970.00 (Cost of acquisition), resulting in a capital gain of Rs. 83,913.75.
  • Finally, the capital gain is subject to a 10% tax rate, as per Section 112A, without the benefit of indexation. The investor would pay a 10% tax on the capital gain amount of Rs. 83,913.75, which is the tax liability.

Since the gains are WITHIN THRESHOLD LIMIT OF RS. 1,00,000, the tax will be “NIL” or “0”.

Can you partially redeem the units?

Yes, you can redeem mutual fund units partly. Mutual funds are designed to offer liquidity to investors. You have the flexibility to redeem a portion of your units, leaving the rest of the investment intact. Keep in mind that the tax implications for the redeemed portion will depend on the holding period, just like in the case of the entire investment.

Understanding the tax implications of your investments is essential to make informed financial decisions. In the case of mutual funds, long-term capital gains tax is levied on gains from equity-oriented funds held for more than one year. By following the guidelines set by the government and consulting with a financial advisor, investors can minimize their tax liability and maximize their returns on mutual fund investments.

Source Link: https://www.financialexpress.com/money/i-invested-rs-45000-in-sbi-infrastructure-fund-in-2007-will-there-be-ltcg-tax-if-i-redeem-now-3276362/

Website Link: https://www.taxbuddy.com/


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