Skip to main content

Long term capital gains tax Impact on Goals

Best SIP Funds to Invest Online 


One of the biggest fears of equity investors has come true: Long term-capital gains (LTCG) tax on equities is back. Expectedly, the announcement made by the Finance Minister on 1 February 2018 rattled the stock market, sending the markets on a down ward spiral. The Sensex tanked by more than 1,000 points (as on 2 February 2018) since the announcement. Grandfathering of capital gains till 31 Jan 2018—LTCG earned up to this date won't be subject to tax—prevented the market from plummeting on Budget day, but it could not rein in the fall the day after. 

Market has accepted 10% tax on LTCG because of the grandfathering of gains till 31 Jan 2018. However, it will realise other negatives like continuation of STT, not providing indexation benefit to long-term equity investors, etc. later

How LTCG impacts you 
Since the securities transaction tax (STT) was introduced as an alternative to LTCG tax on equities, retaining STT was a bigger shock for investors. "The real disappointment was the continuation of STT along with the LTCG tax. Logically, there should be just one tax. 

Besides their return potential, equities drew investors because of tax-free gains, imposition of LTCG tax will now hurt inflows. LTCG of 10% reduces the relative attractiveness of equity as an asset class and can act as a short-term dampener. 

The attractiveness of equity compared to debt funds stands eroded because its tax advantage is now gone. While LTCG tax is 10% without indexation for equities, it is 20% for debt funds with indexation benefit. Assuming 8% return from debt funds and 5% inflation, the effective LTCG tax on debt funds works out to be 7.5%. However, equities will become attractive, if their returns are higher. 



Holding equities will also get costlier now. With STT and LTCG tax in place, the long-term cost of holding equities has gone up, which don't have to pay LTCG tax, foreign institutional investors will now have to pay tax on their trades which will push up their costs. 

Also, though the grandfathering clause provides some relief, it has also made things difficult. The highly technical construct of the amendment seeking to grandfather the appreciation in the value of the stocks and mutual fund units up to 31 Jan 2018, has made things complex for investors and fund managers. FII investments may be affected in the short run as tax compliance stands to increase their operational costs. 

The stock market volatility may also go up now because the LTCG tax will result in a behavioural change among investors. Since the difference between the STCG and LTCG is only 5% now, few investors may wait for a year to sell. Resultantly, the stock market volatility will increase due to increased shortterm activity

Investors, however, can now exercise greater freedom when it comes to redeeming their equity investments. As the difference between LTCG and STCG is 5%, investors who had wait for an entire year just to avail of the tax benefits, even if they wanted to book profits earlier, won't have to stay invested. On several occasions, waiting for an entire year has proved to be costly for investors. Investment decisions will now be based on the market situation and not based on tax concerns

Monthly investments to build Rs 10 lakh corpus 
You need to invest more to build the same corpus 

Monthly Investment
*12% returns will be reduced to 10.8% at 10% tax. But comparison is with 11% return to account for no LTCG tax up to Rs 1 lakh. 

The way out 
Given that LTCG on equities is tax free only up to Rs 1 lakh per financial year, investors need to pare down their return expectations. Though there will be some cushion due to the Rs 1 lakh exemption limit, investors need to bring down their return expectation at bit and invest more to achieve their goals



How much should this increase be? The exact additional sum you will need to invest to make up for the fall in your equity portfolio return will depend on your investment horizon and your return expectations. As a thumb rule, now you need to increase investment by 10-25%. The additional amount you need to invest to build the desired corpus goes up significantly, with longer holding periods. This is because the impact of a 1% cut in returns on account of LTCG tax gets significantly higher with longer investment periods due to the impact of compounding. 

Another strategy can be to make use of the tax exemption provision and book profits up to Rs 1 lakh per financial year and reduce LTCG tax outgo. Please note, you can't carry forward the Rs 1 lakh sum—you cannot claim Rs 10 lakh exemption over a 10 year period. So, you will have to book profits each year. Instead of accumulating capital gains forever, investors now need to churn their portfolio (book profit and invest again in other assets) on a regular basis to lower their tax liability. 

The benefit of this regular churning will depend on the size of your total corpus. Churning will work well for retail investors whose portfolio size is small. But it becomes less effective for high-net individuals and may not be worth the trouble. To illustrate, if an investor's total equity corpus is Rs 5 lakh, his annual return at 12% will be just Rs 60,000. This entire capital gain can be made tax free by churning. Now consider an investor with an equity corpus of Rs 25 lakh. At the same rate of return, is annual gain will be Rs 3 lakh. 

After saving tax on Rs 1 lakh, he will have to pay tax on the remaining Rs 2 lakh, limiting the impact of churning. Finally, for an investor with an equity corpus is Rs 1 crore, capital gain will be Rs 12 lakh. The tax benefit on Rs 1 lakh will be insignificant for him, and so churning may not be worth the effort. 

If you are interested in following the annual profit booking and churning strategy, you should keep two things in mind. First, you must reinvest the proceeds and not divert them for consumption, or you will miss out on the power of compounding and put your goals at risk. Second, you need to know about tax rules. There won't be any issues, if you are shifting from one stock or mutual fund to another. However, you need to be careful, if you are selling a stock to book profit, and want to buy back the same stock. 

There is no rule which says that you can't buy back a stock after you sell it. However, you need to keep some gap between the sale and the repurchase, so that the delivery of sales and purchase transactions happens separately

Finally, a word of caution for those looking to invest in Ulips. While the government has not tinkered with the tax structure of Ulips, investing in Ulips will work only for the informed investors, who understand their complex cost structures. Since the commission on low-cost Ulips is minimal, even zero, agents won't push them. So, if you are not alert, you may be miss-sold high cost Ulips or other opaque insurance products such as traditional plans. High surrender charges is another issue with these products. Also, Ulips tax advantage could also go. To create parity on tax, the government may introduce tax on Ulips and, if it happens, investors will get trapped


SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

Popular posts from this blog

How to gauge the risk profile of your mutual fund portfolio?

MUTUAL funds are considered to be an investment option for those who do not generally devote a lot of time to monitoring and managing their portfolios. Investors experience both good as well as tough times as far as mutual fund investments are concerned. But while evaluating the portfolio of their equity mutual fund holdings there are a few points that one should check to know about the level of risk that they are facing. Often there are situations where there is a higher risk than what was estimated initially. Here are a few ways to evaluate various risk levels. Individual holding exposure : The portfolio of the equity fund where one has invested or plans to invest needs to be scrutinised to see whether the risk levels are such that could lead to a larger volatility in the holdings. Depending upon this factor and the risk taking ability of the investor the choice about a particular fund as an investment should be made. One key point to watch out is whether there is a large ex...

Stick to Good Fund Manager who Can Multiply Your Investment

A manager may be the difference between the best and worst funds. Here's how you can find the right one    Does a mutual fund manager make a difference to your investment? The answer may not be as easy as you think, since most best-performing mutual funds have moved away from individualistic fund management to process-driven methods, limiting the scope of an individual's role in investment decisions. In fact, many fund managers would speak at length about how the "system" their fund house has in place makes their task of picking stocks easy even though it restricts their freedom. Still, the question is important, especially after recent reports that the Securities and Exchange Board of India ( Sebi ) may ask fund managers to disclose to investors their track record of managing money. Let us take a look at the universe of large-cap funds over the past five years. According to Value Research, an independent mutual fund tracking firm, the topper in the category is DSP...

Tata Fixed Income Portfolio Fund dividend

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)       Tata Mutual Fund has announced dividend under the dividend option of Tata Fixed Income Portfolio Scheme B2 Plan A-DQ, Tata Fixed Income Portfolio Scheme B2 Reg-DQ and Tata Fixed Income Portfolio Scheme B2 Direct-DQ. The record date has been fixed as August 29, 2013. Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C. Invest Tax Saving Mutual Funds Onlin...

NRIs and direct taxes code (DTC)

DTC Proposes To Do Away With Special Provision That Allows NRIs Liberalised Duration Of Stay In Country      THE new direct taxes code could bring a large number of global Indians under the tax net, as it does away with a provision that allowed individuals to escape tax in any country citing double tax avoidance.    The new legislation, introduced in Parliament on Monday, says an individual shall be a resident of India in any financial year if he is in the country for more than 59 days in that year, and has been has been India for more 365 days in four preceding financial years. A number of Indian industrialists including Vedanta's Anil Agarwal and Essar's Ravi Ruia have acquired non-resident status over the years.    The DTC has only attempted to clean up the provision in line with the laws globally. A phrase "being outside India" in the existing income tax law exempted individuals who stay outside the country for six months from paying taxes. This was prone ...

Impact of Demonetization

Impact of Demonetization:   ·          Improvement in Government's fiscal position going forward:   Ø   Higher benefits for the Government if lesser currency notes comes back into the system Ø   Increase in Tax Reporting leading to better revenue hence better fiscal   ·          System Liquidity to increase going forward ·          Inflation expected to fall further ·          Growth to be positively impacted over medium to long term with near term hiccups   Duration Funds:   In light of the above facts and expectations investors may consider long duration funds ( Reliance Dynamic Bond Fund, Reliance Income Fund & Reliance Gilt Securities Fund ) as these funds would benefit on further easing of yields over next 12 to 18 months.   'Reliance Dynamic Bond Fund' aims at generating returns even in stable interest rate markets by exploring different trading strategies. The strategy to differentiate Tactical Positions f...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now