Will LTCG tax hurt mutual fund flow?4 min read . Updated: 20 Mar 2018, 01:59 AM IST
We ask the experts if the reintroduction of LTCG for equities and equity mutual funds will have an impact on the inflows
Budget 2018 reintroduced long-term capital gains tax (LTCG) for equities and equity mutual funds, which had been tax-free since 2004. Will this result in lower inflows? We ask the experts.
Sanjay Sapre, President, Franklin Templeton Investments – India
There are three reasons why I feel inflows may not be impacted. First, equity flows have been more a function of market cycles than of tax changes. In fact, we are in a much stronger position now with sustainable flows from systematic investment plans (SIPs) of nearly Rs6,500 crore every month. We have also seen in the past that when the LTCG tax period for debt funds was increased from 1 year to 3 years in 2014, the impact was short term.
Second, I continue to be a strong advocate of the growth of mutual funds in India’s savings pie, mainly because we have just scratched the surface in terms of penetration (less than 20 million Indians own mutual funds). Increasing levels of financial literacy, and an understanding that mutual funds are best suited for long-term wealth creation will be key growth triggers. New investors will add to the flows and also help cushion any impact on existing flows due to LTCG tax.
Third, equity is a long-term asset class, which has returned almost 18% annualized gains over the last 5 years till December 2017, as per the Crisil-Amfi Equity Fund Performance index. This exceeds returns from any other asset class over this period. If the reason for investing is to reach a financial outcome, then even if returns are slightly lower due to LTCG exceeding Rs1 lakh, the reason may not change.
Jignesh Desai, Co-founder & joint managing director, NJ India Invest Ltd
There is a lot of hullabaloo in the markets about the new LTCG tax on equity. The extensive media coverage of the LTCG tax has left investors in two minds about equity mutual funds. Many investors are now under the impression that this tax will consume their returns, and that equity mutual fund investment does not remain as attractive as before.
If you invest Rs10 lakh in an equity scheme that gives you a 15% compounded return, you will earn Rs30.5 lakh after 10 years if there is no LTCG tax and Rs27.5 lakh if there is a 10% LTCG tax (14.13% effective returns). After 20 years, your returns without LTCG tax will be Rs1.5 crore (without LTCG tax) and Rs1.4 crore (with LTCG tax; 14.44% compounded return). The difference between the two returns over this long period of investment is minuscule.
As the investment period increases, the impact of the LTCG tax becomes negligible. Over a 20-year period, it is just half of a per cent from our example.
The re-introduction of LTCG tax won’t have a significant impact on investors’ wealth. Equity mutual funds offer an opportunity to create wealth, so the investor does not have to focus on the taxation aspect, but on its returns potential. It is likely that there won’t be any impact on the inflows into equity.
Kailash Kulkarni, Chief Executive. L&T Investment Management Ltd
The re-introduction of LTCG tax may not impact mutual fund flows. The positives far outweigh a small sentimental issue of implementation of the tax.
First, as a product, mutual funds help all segments based on their needs—right from the common man to the high net worth individual. Second, despite the significant growth of the mutual fund industry, penetration is extremely low, with roughly under 20 million unique investors. With growing awareness levels and India’s move towards financial inclusion, a large number of individuals would begin investing in mutual funds. The ease of investing has been improving in the last few years, as seen in the case of investments through online platforms.
The move from physical KYC was a dampener. After the central KYC mandated by the Ministry of Finance, and the Securities and Exchange Board of India (Sebi) streamlining the same, investing has become easy. This has only become better after the e-mandate registrations by the National Payments Corporation of India.
Given these factors, the industry will witness a notable growth in number of investors.
Consequently, a small tax of 10% would not be the key factor to move away from mutual funds. Moreover, the tax will be applicable when gains from mutual funds surpass Rs1 lakh in a financial year. So, it may not be applicable to small investors.
Anuradha Rao, managing director and chief executive officer, SBI Funds Management Co. Ltd
Reintroduction of the long-term capital gains (LTCG) tax on equity was a much-anticipated move with India being the only major economy which had zero taxation.
Equities have created significant wealth over the years, but had a preferential tax treatment. To align this treatment and still keep the asset class attractive, the government decided to re-introduce LTCG tax at 10% for capital gains over Rs1 lakh.
However, reintroduction of the LTCG tax will not affect mutual fund flows in a significant way. The government has taken due care that the implementation of the tax does not disrupt its plans of financial inclusion and financialization of savings.
We believe the impact of LTCG tax on retail investors will be marginal. For retail investors to come under this tax bracket, they will have to make an investment of over Rs5 lakh with an expected annual returns of more than 20%.
Changes in tax structure in other asset classes such as debt were also expected to impact the flows, however it turned out to be different. The same is expected with equity as well. One important point to note is that equity remains the least taxed asset class.