Impact Of Budget 2021 On Equity Mutual Fund Investment

Equity mutual funds are those that are primarily invested in equity securities or stocks of companies. Multi-cap mutual funds are funds invest in stocks of various companies that have diverse market capitalisations.

If profit is generated on redemption of equity funds, the same is subjected to taxation. Profits on equity mutual funds are considered as long-term capital gains under the Income Tax Act, if the securities are held for more than one year and the profit is more than Rs. 1 lakh. Long term capital gain on equity funds is calculated by deducting the cost of acquiring the equity from the amount that is realised upon redemption of these funds.

Tax on equity funds was reintroduced after fifteen years in the budget of the year 2019. A tax rate of 10 per cent was introduced on capital gains above Rs. 1 lakh provided the securities were held for a minimum of one year. The tax slab for the highest bracket of these capital gains stands at 15 per cent.

The budget of 2021 has been a sigh of relief for investors since there has been no hike in these tax slabs. This step will ensure that the divestment plans go smoothly for the next year as well.

How to manage your investment in equity mutual funds?

  • Make sure you understand the scheme of the equity fund in which you are investing. This will prevent you from investing in the wrong stocks.
  • Do not indulge in any frequent buying and selling. Focus more on long-term investment.
  • Choose equity funds with a good track record in relation to their performance for at least five years.
  • Plan your investment goals. Decide what time you want to invest in the market, when you want to exit and what are your financial goals.
  • Equity investment is likely to perform better than debt instruments as it has a better performance post adjustment of inflation.

With no change in the new tax regime for equity mutual funds, it seems that the new budget is in support of investors. Any increment in the tax rates would have hurt the sentiments of investors and certainly discouraged retail investors from investing in the stock market.

Just because there are certain tax implications on equity fund investments, the same should not discourage you from investing. Plan your mutual fund investments smartly and reach your desired financial goals.