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Could there be a tax googly in equity funds too?

Are your existing equity fund returns safe from changes in tax laws? Not really

If you have longstanding equity or equity fund investments that you intend to keep for the long-term, then it might makes sense to just sell these investments and buy them again. That sounds like a strange idea, but if you draw a lesson from what the government has done in this budget, then this roundtrip of your investments could be one way of ensuring the returns that you have already generated stay safe from taxation.

Consider what has happened to investments in non-equity funds. As I've written about earlier, the government has changed tax rules for these funds. Earlier, gains from these investments were considered long-term capital gains after one year, now that period has been changed to three years. The finance minister has clarified that the new rule will apply to redemptions made after budget day.

Even though this is not technically retrospective, it retroactively changes the tax implications of something that you did in the past. You could have made an investment a year or two ago in the knowledge that there would be a certain tax liability when you redeem your investment. Now, that liability has been increased. While the government has the legal right to do so, savers and investors are completely justified in feeling cheated in the manner in which their gains have been taxed.

Anyhow, the manner in which has a rather alarming implication for equity fund (and equities) investors. In these, investors are sitting with returns generated over years which can be redeemed without any capital gains tax because currently there's no tax on long-term capital gains. But what if the government decides to play the same trick that it just played on non-equity investors? What if it decides, at some point, to impose a long-term capital gains tax on equity investments?

There's no reason why this can't happen. However, unlike debt funds, the currently zero tax rate actually gives you a way out. Just redeem your investments and reinvest them. This will make your existing long-term returns immune to any future change in the tax laws. There are a couple of downsides to you'll pay a small Securities Transaction Tax, and your investment will be considered short-term for the following twelve months. I'm not saying everyone must do this, but it's certainly something to think about.