While the introduction of the LTCG (long-term capital gains) tax was widely expected and predicted, the manner in which the government executed it was far from imagination. We, as analysts, were expecting an extension of 1 year LTCG to 2 years to align it with real estate taxation.
While the introduction of the LTCG (long-term capital gains) tax was widely expected and predicted, the manner in which the government executed it was far from imagination. We, as analysts, were expecting an extension of 1 year LTCG to 2 years to align it with real estate taxation, but there was always a doubt as the government was looking for revenue generation. We expected some tweeks in STT as that would’ve generated the required revenue, but were not expecting a 10% levy on the long-term tax unless short term gains were increased too. The gap of just 5% in STG and LTG is nothing. This will encourage short-term trading as well. This surprise or shock was decorated with a candy of the Grandfather Clause, which ensured that the investors will in effect only pay tax on the gains earned from Feb 1, 2018.
Equities as an asset class have created long-term wealth. Investors have amassed wealth because they remained invested in equities for the long term. Taking a look at the benchmark index NIFTY50 which has delivered a CAGR of approximately 12 percent, since the last 20 years, how good is that? Most equity-riented mutual funds have even performed better than the index, creating a magnetic effect on their clients. On an average, equity-oriented mutual funds have delivered over 20%+ return. If you had invested Rs 1 lakh in the Nifty 20 years ago, your investment value today would be about Rs 11 lakh. At the same time, an equity fund would be valued at a whopping Rs 53 lakh. The power of compounding plays very effectively over the long term. So, we doubt that the levy of LTCG will drive away the investor from heading to this asset class. However, one needs to have a sound advisor to guide them and make them understand these calculations.
The tax rate on LTCG on equity shares and equity mutual funds is 10 percent, which was earlier nothing. If we look at other investment options, in most cases returns are taxable as per tax slab, which implies if you happen to be in the 30 percent tax bracket, you will have to pay 30 percent tax. Hence, even when we compare with other investment avenues, equities are still receiving a preferential tax treatment even after taken into consideration 10 percent tax. And despite this you also have an exemption of Rs 1 kah profit, which further improves the return. For example: If we invest Rs 2 lakh and they become Rs 3.5 lakh by when we plan to sell them, then we only owe a 10% tax on Rs 50k as 1 lac of profit is exempt from tax, i.e. Rs. 5k on a profit of Rs 1.5 lakh initially.
So, overall, we believe that the focus would revert back to corporate earnings with a little impact of the Budget on the equity markets or mutual funds. LTCG is just playing on everyone’s mind because it was non existent earlier. Therefore, people are finding it hard to accept this change, but with time we believe this perception will change as investing in equities from a long-term perspective remains attractive even now.
(By Abhinav Angirish, Founder, Abchlor Investment Advisors Pvt Ltd)