LTCG tax should not deter you

The Government has recently re-introduced Long Term Capital Gains (LTCG) tax on sale of equity shares or units of equity mutual funds. We would like to take this opportunity to inform our investors the impact of this tax on investment in mutual funds. We have used information that is available in the budget document.

About LTCG Tax

Investors will now have to pay 10% tax on capital gains (Plus Applicable Surcharge [10% of tax where income exceeds Rs. 50 Lakhs and 15% of tax where income exceeds Rs. 1 Crore] and 4% Health & Education Cess) arising from sale of above investments if the investment is sold / redeemed after 1 year or more. The LTCG will be calculated after deducting Rs. 1 lakh from the overall gains made by selling equity shares of a company or units of equity mutual fund for that financial year. Indexation benefit is not allowed.

The LTCG tax will be imposed only on the long-term capital gains exceeding Rs. 1 lakh on or after April 01, 2018. Gains accrued up to January 31, 2018 will continue to be exempt. So, if the LTCG is less than Rs.1 lakh in a financial year, then you are not liable to pay any LTCG tax. If the Long term gains are more than Rs.1 lakh, let's say Rs.1.50 lakh, then taxable LTCG will be Rs.50,000 (Rs.1,50,000 – Rs.1,00,000) and tax payable on this LTCG will be Rs.5,000 (10% of Rs.50,000). The table below will help you in understanding how LTCG is taxed with different examples.

Tax Scenario-

Tax Scenario for Equity Shares/ Equity Mutual Funds Units

Scenario

Purchase Date

Purchase Value (Rs.)

Value as on January 31, 2018 (Rs.)

Sale Date

Sale Value (Rs.)

Difference between Sale Value and Purchase Value/Market Value of January 31, 2018 (Rs.)

Tax

1

On or before April 01, 2017

1,00,000

1,50,000

March 31, 2018

3,00,000

3,00,000 - 1,00,000 = 2,00,000

No LTCG tax. LTCG Tax is applicable from April 01, 2018.

2

On or before May 01, 2017

1,00,000

1,20,000

April 30, 2018

1,40,000

1,40,000 - 1,20,000 = 20,000

No LTCG tax. Tax applicable on gains exceeding Rs.1 lakh

3

On or before May 01, 2017

5,00,000

6,50,000

April 30, 2018

8,00,000

8,00,000 - 6,50,000 = 1,50,000

LTCG Tax applicable on gains exceeding Rs.1 lakh (1,50,000 - 1,00,000) = 50,000
Tax is Rs.5,000 (10% of Rs.50,000)

4

On or before May 01, 2017

4,00,000

2,00,000

April 30, 2018

6,00,000

6,00,000 - 4,00,00 = 2,00,000

LTCG tax is applicable on gains exceeding Rs.1 lakh (2,00,000 - 1,00,000 )= 1,00,000
Tax is Rs.10,000 (10% of Rs.1,00,000)



One advantage for investors who have invested before Jan 31, 2018 is that the market value of investments as on Jan 31, 2018 will be considered as Cost of Acquisition for calculating LTCG instead of the Actual Cost at the time of purchase (Scenarios 2 & 3 of the above table explains the benefit of this clause). If the market value of investments as on Jan 31, 2018 is less than the Actual Cost of acquisition, the Actual Cost will be considered for calculating LTCG ( Refer Scenario 4 in the above table).

As a long term investor, you should not be worried about the Long Term Capital Gains tax. If we take scenario 3, the tax payable on the redemption amount of Rs.8,00,000 and Capital Gains of Rs.1,50,000 is Rs.5,000/- which is 0.63% on redemption amount and 1.67% on Actual Gains (Rs.3,00,000 = Rs.8,00,000 - Rs.5,00,000) respectively.

After the re-introduction of the LTCG tax, it makes more sense for investors to focus now on choosing right funds that meet their investment objective which will help them achieve their financial goal over long term.

The Central Board of Direct Taxes (CBDT) has issued 24 frequently asked questions (FAQs) on long term capital gains (LTCG) taxation on equity shares proposed in the recent Union Budget. Click here to know more

In view of the growth prospects of the Indian economy, combined with abundant liquidity available both globally and locally, equity investments will most likely drive smart returns going ahead. The LTCG tax, therefore, shouldn't be a problem for people looking for handsome gains in the long run.

As per Hobsons Choice Theory, when there are limited options, no matter what the circumstances, everyone will have to take it and accept it in their stride or leave it entirely. However, in our view, the equity market will always remain lucrative compared to other financial assets as the returns have a higher chance of beating inflation compared to other asset classes.

Investors must continue to follow their existing strategies as the Indian markets have a plethora of options which are being supported by strong growth, healthy corporate fundamentals, and bullish macro and government initiatives which will continue to drive the economy and create wealth irrespective of the taxes.

The new initiatives by our government are very progressive and will boost the Indian equity markets in the long run irrespective of short-term hiccups. Therefore, a strategy which is well tried and suited to a particular individual shouldn't be abandoned just on the basis of tax consideration. In fact, taxes are to be paid out of income and not out of capital. Therefore, ideally, tax should not be a worry.

Source: Quantum, FE

 

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