The introduction of the long-term capital gains (LTCG) tax, in the Budget 2018, on listed equities is being viewed by many people as a measure which has taken the sheen off equity markets. After all, stock investments are fraught with risks, and is it worth taking the risk if the rewards get taxed? Experts, however, say that whatever be the case, investing in the stock markets is still a better option, especially for risk-taking investors.
They argue that 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.
“The LTCG tax on long-term gains arising from equity and equity-backed units should not bother long-term investors. The 10% tax is a subsidized rate compared to 20% tax on gains from unlisted scrips and immovable property. Also, historically, equity has beaten inflation by a wide margin and on a consistent basis. In general, equity has delivered a healthy CAGR of 15% in the last 38 years. So, even if it comes down by 100 to 150 bps owing to the LTCG tax, that would not make equity less attractive,” says Jaikishan Parmar, Senior Equity Research Analyst, Angel Broking.
Some market experts say that irrespective of the LTGC tax imposed in the Union Budget 2018, investors have no option but to invest their money in a booming and young economy such as India, which is developing a strong foothold amongst other developing nations in terms of GDP growth. “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,” says Jimeet Modi, CEO & Founder at SAMCO Securities.
How to Invest in the market
Experts advise that 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,” informs Modi.
Moreover, long-term investors should continue to focus on companies which are reporting steady growth in revenues and profitability (EBITDA, net profit), coupled with improving return ratios and strengthening the balance sheet. “Only after satisfying these factors, an investor should consider investing in a stock. One should also closely look at corporate governance practices, in addition to any shares pledged by the promoter,” says Parmar.
You also need to remember that you are now required to pay 10% LTCG tax on equity only when your long-term capital gains exceed Rs 1 lakh in a year. Therefore, if you are a small investor, then this tax should not worry you at all.