LTCG tax is back

As you are aware, your debt fund investments like MIPs and liquid funds are subjected to both short and long term capital gains tax (LTCG tax).

For equity, there has been tax only on short term capital gains. Long term capital gains have been exempted from taxation for the last 13 years.

This has been changed by the budget presented yesterday.

Henceforth, long term capital gains on shares and equity oriented funds would be subjected to a tax of 10%.

For the purpose of calculation of long term capital gains, the NAV or share price would be taken as on 31’st January 2018.

Let us assume, you invested in an equity fund in 2010 at NAV of Rs.100. The NAV as on 31’st January 2018 is Rs.300. In 2020, when you redeem this fund, the NAV is at Rs.400. For calculating long term capital gains, your cost would NOT be taken as Rs.100 but only at Rs.300. This has been done to ensure that investments made till 31’st January 2018 does not suffer long term capital gains tax. Any investment from February 1’st 2018, would be subjected to long term capital gains tax of 10%.

There has been strongly divided opinion whether the taxation is correct or not. That debate would continue. But what matters to us is the fact that this tax has to be paid for equity investments made from now on.

We’ve to wait and see how this impact markets in the short term. I would not be surprised if markets react adversely in near future. These things are difficult to predict and does not affect the long term growth trajectory. Earnings have started picking up from last quarter and structurally corporate India is expected to deliver robust growth over next few years. In the long run, only earnings matters and sentiments which are so prominent in near term dissolve.

In 2014, I shared with you a tweet of Ben Carlson.

Start with a $1 investment that doubles in value year.

1) Sell the investment at the end of the year, pay the tax and reinvest the proceeds.

Do the same thing every year for twenty years.

End up with $25,200 clear profit.


2) Don’t sell anything.

At the end of twenty years, end up with $692,000 after-tax profit.

See the difference in long term wealth creation when there is no churning.

We advised no churning even when there was no tax on long term capital gains. It now becomes all the more important to keep the churn very minimum.

Equity as an asset class delivers superior returns over all other asset classes in the long run. This was true when there was no tax and continues to be true when there is a 10% tax.

Currently there has been no indexation benefit for LTCG on equity. This is because the cost price of previous years has implied indexing as only the price as on 31’st January 2018 would be taken from now on.

Till 2004, long capital gains from equity was taxed either a flat 10% or 20% with indexation. I would not be surprised, if in the coming years, both the options are again provided to investors.

Now that you are aware of the changes, what you need to do?

Nothing. Just continue to stay the course, as always.