Currently as per Section 80C of the Income-Tax Act, an individual can claim a deduction of Rs 1 lakh for a wide cross section of investments, including equity linked mutual funds. As per the new tax regime, this is proposed to be raised to Rs 3 lakh per annum. Added to this, till now this investment could go only in equity linked mutual funds, however, in the new Direct Tax Code, you can invest this amount in debt-oriented mutual funds also. This flexibility will help financial planners recommend debt products also to investors who do not have an appetite for equity products. Above all, this is a positive move for the mutual fund industry, which could witness higher fund flows.
In terms of capital gains, there is one change. Capital gains will be calculated for the asset held for a period of more than one year from the end of financial year in which asset is acquired. While earlier long-term capital gains would be 366 days, now it could be from 366 days to 730 days, depending on the period when the purchase was made in the financial year. Capital gains will be included in the total income and taxed at the applicable rate.
Capital gains arising from sale of units of an equity-oriented fund, which are held for more than one year, shall be computed after allowing a deduction at a specified percentage of capital gains without any indexation. Therefore, if the "capital gains" before the deduction at the specified rate comes to Rs 100, it would stand reduced to Rs 50 (if the specified deduction rate is 50%). This capital gains would then be included in taxpayers' total income and taxed at the applicable rate. While those in the lower tax bracket will benefit, since short term capital gains currently stands at 15%, those in the uppermost tax bracket will not gain. However, as there will be a shift from nil rate of tax on listed equity shares and units of equity-oriented funds held for more than one year, an appropriate transition regime will be provided, so that the markets are not disturbed.
