The latest budget has an announcement on Long Term Capital Gains Tax (LTCG). It has drawn a lot attention. Why? What does it mean? And how does it affect your investments? Allow us to elaborate.
The budget proposes that a nominal tax of 10% will be levied from 1st April 2018 on any gains in excess of Rs.1 lakh on equity/equity funds that are held for more than one year.Any such gains made till 31st Januray 2018 is Garndfathered-meaning gains made till 31st Jan 2018 will not bear LTCG.
For example, let’s say you have invested Rs. 10 lakhs in an equity fund and it has grown to 12 lakhs as on 31st January 2018 and further it grows to RS. 15 lakhs by 31st March 2019.
Now, if you sell this investment, your gain stands at Rs. 5 lakhs, out of this gain RS. 2 lakh will not be taxed, as gains till 31st Jan 2018 are grandfathered. LTCG will be applicable only on RS. 3 lakh,. an LTCG tax of 10 percent will be charged on the amount you make in excess of Rs.1 lakh, i.e., 10 percent on Rs. 2 lakh, which works out to Rs.20,000/-. In this example overall absolute tax works to be of 2% of the investment.
If you are betting on the ‘India Growth Story’ and are invested in equity funds for better gains, you will view this long term capital gain (LTCG) tax in a broader sense as a benefit and something to be welcomed.
GST and demonetisation were part of the broader agenda of the government’s plan for inclusive growth and better governance. Furthermore, this government is committed to reforms in infrastructure, housing, rural development, and related sectors. All this will translate into better corporate business growth and income growth of companies.
This in turn will help Indian equity markets emerge stronger and fuel economic growth in India. If you are invested in equity, you are part of the India Growth Story.
By charging LTCG, the government is asking you to contribute to the India Growth Story. If you are able to earn better double digit returns because of these reforms, you must be broadminded about paying the tax.
LTCG will benefit both the government and the investor. It will ensure equities remain the most efficient asset class for wealth creation, in comparison to other asset classes like gold, fixed income, and real estate.
Governments will come and go. Finance ministers will read budget speeches and retire. There may be periods in which your investment returns are subject to different rates of taxation or no tax at all. Still, corporate India will continue to deliver, as they have been now for years and decades.
The bottom line: Tax is incidental. Taxation should not derail you from your final investment objective.
If you’re still not convinced LTCG is good for you as an equity investor, talk to us. We’re happy to help.