The recently announced Union Budget of 2021 has introduced new tax implications for long-term capital gains (LTCG) and dividend income on equity and equity mutual funds. While LTCG will continue to be taxed if profits exceed Rs 1 Lakh, annual dividend income will now be taxable in the hands of the investor. This has caused concerns among investors, but there are some strategies to mitigate the impact of the new taxes on their portfolios.
Long-Term Capital Gains (LTCG) and Dividend Income Tax Implications
The Indian government has recently revised the tax implications for long-term capital gains (LTCG) and dividend income on equity and equity mutual funds in the Union Budget of 2021. These changes have raised questions and concerns among investors, who are looking for strategies to mitigate their impact.
Background
Prior to the budget, LTCG arising from the sale of equity shares and equity mutual funds held for more than a year were exempt from tax. However, the new budget has introduced a tax rate of 15% on such gains exceeding Rs 1 lakh.
Additionally, dividend income from equity and equity mutual funds was previously tax-free in the hands of the investor. This is because companies were required to pay dividend distribution tax (DDT) before distributing dividends to shareholders. However, the budget has abolished DDT, making dividend income taxable in the hands of investors.
Impact on Investors
These changes have significant implications for investors, especially long-term investors who have been holding equity investments for a substantial period. Here are some potential consequences:
Strategies to Mitigate the Impact
While the new tax implications cannot be avoided, there are some strategies that investors can consider to mitigate their impact:
FAQs
1. What is the LTCG tax rate for equity investments held for more than a year? Answer: 15% on gains exceeding Rs 1 lakh.
2. Is dividend income from equity investments now taxable? Answer: Yes, dividend income is now taxable in the hands of the investor.
3. How can I reduce the impact of LTCG tax? Answer: By staggering sales, investing in tax-efficient instruments, and considering long-term holding.
4. What is the best strategy for mitigating the impact of dividend income tax? Answer: Consider dividend reinvestment plans or investing in tax-free bonds.
5. Are there any changes in the tax treatment of short-term capital gains? Answer: No, short-term capital gains continue to be taxed at the applicable income tax slab rate.
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