Investors will have to pay 10 per cent tax on distributed income from equity oriented mutual funds, as per the Budget proposals announced today.

Besides, the overall investor sentiment will be hit with the introduction of 10 per cent tax on long term capital gains exceeding Rs 1 lakh, as mutual funds have recently emerged as a key route to invest in stock markets, experts said.

“Sentiments may get impacted as mutual funds have been gaining traction among investors as route to invest in stock markets,” HDFC AMC Chairman Deepak Parkeh said.

Increasing investments

Domestic mutual funds had pumped in a staggering over Rs 1 lakh crore in the stock market last year, much higher than over Rs 48,000 crore infused in 2016 and more than Rs 70,000 crore in during 2015. In fact, the investment by mutual funds in equities have outshone those by foreign portfolio investors (FPIs) in past few years.

While unveiling the Budget proposals for 2018–19, Finance Minister Arun Jaitley proposed to introduce a tax on distributed income by equity oriented mutual funds at the rate of 10 per cent to provide a level field across growth oriented funds and dividend distributing funds.

This is in addition to the Securities Transaction Tax (STT) on transaction in shares, bonds, debentures, derivatives units, interest in securities and equity mutual funds.

‘Modest change’

Jaitley further said that the returns from the stock market are quite attracting and it was the time to bring them under the ambit of capital gains tax. However, observing that a vibrant equity market is essential for economic growth, the minister said, “I propose only a modest change in the present regime. I propose to tax such long term capital gains exceeding Rs 1 lakh at the rate of 10 per cent without allowing the benefit of any indexation.”

He further said all gains up to January 31, 2018 from sale of equity will be grandfathered. Presently, gains from sale of equity after one year were exempt from capital gains tax.