Three easy-to-understand charts that show you exactly how different mutual funds are taxed.

The Finance Bill, 2018 has introduced two major tax changes to Equity Mutual Funds — 10% tax on Long Term Capital Gains above ₹ 100,000; and 10% Dividend Tax.

Equity Mutual Funds bought on or before January 31, 2018

Any notional long term gains until January 31, 2018 have been “grandfathered” or exempted while calculating for long-term capital gains. So you can assume the new cost of holding your Equity Mutual Funds is the closing price on January 31, 2018.

Don’t forget that the exemption of ₹ 100,000 applies to all your Equity Capital Gains — across Stocks and Equity Mutual Funds and not just investment in one scheme.

Equity Mutual Funds bought on or after February 1, 2018

Short-term Capital Gains continue to stay at 10%, while you pay Long-Term Capital Gains on amounts greater than Rs. 100,000 in a financial year.

Debt Mutual Funds

There is no change to the taxation of Debt and Liquid Mutual Funds. You need to hold them for three years to be considered Long-Term, and you get the benefit of indexation when calculating your new cost. Indexation considers rise in inflation between the year in which you purchased the debt fund units and the year when you sold them — it allows the tax on debt fund gains to come down significantly.

What are Equity Oriented Funds?

The Income-tax Act defines Equity and Equity Oriented Mutual Funds as those investing in a minimum of 65% in Indian listed stocks.

• Categories such as Large-cap, Small and Mid-cap, Flexi/Multi-cap, Tax Saving (ELSS), Arbitrage, Balanced, and Equity Income funds are counted as Equity Oriented for tax purposes.
• So funds that primarily invest in International Equities are not considered as Equity Oriented for tax purposes.

Which investment option should you now choose — Growth or Dividend?

Our simple rule is: When in doubt, always pick Growth. But this doesn’t apply all the time — so we put together a quick guide to help you choose.

How the new Equity Long Term Capital Gains Tax Works? was originally published in Clearfunds on Medium, where people are continuing the conversation by highlighting and responding to this story.