LTCG and how to invest after it

Finance Minister Arun Jaitley during his budget speech proposed to levy a 10% tax on the Long Term Capital Gains (LTCG) for the profits over Rs 1 lakh on the sale of equity. LTCG tax was reintroduced on the sale of equity without the benefit of indexation. Though there is a provision to grandfather all gains till January 31, 2018, the budget 2018-19 didn’t withdraw the Security Transaction Tax (STT). Besides, the Short Term Capital Gains (STCG) has remained unchanged at 15%. Its impact on the market could be seen with the Sensex tumbling on the day of the Budget, to recover later closing at 35,906.66. The fall continued on the next day as the Sensex on 2^nd February closed on 35,066.75 – 839.91 points down from the budget day.

Quite visibly, LTCG had its impact on the markets. We at Outlook Money decided to check how it affects the investors and access expert opinions on the smart investment for future. 

How will LTCG be calculated?

If the profit of an investor is more than Rs 1 lakh on his equity investment, then he will have to pay 10% LTCG tax. This tax will be effective from April 1, 2018. All investments prior to April 1, 2018 will also come under this tax ambit. But the grandfathering measure till January 31, 2018 will provide some relief.

Example of grandfathering measure: If the price of share ‘X’ purchased six months before January 31, 2018 was Rs 1500 and its price on January 31, 2018 was Rs 3000, then there will be no LTCG on the profit of Rs 1500. However, any profit over Rs 1500 earned after January 31, 2018 will be taxed 10% under LTCG.

Was the move surprising?

"The decision to levy LTCG on equity at the rate of 10% is not surprising. The fact that the gains made up to 31st January 2018 will be grandfathered indicates that the government has thought through the proposal quite clearly", said G Pradeepkumar, Chief Executive Officer, Union Asset Management Company.

Will this tax affect investment pattern of the investor?

According to Kalpen Parekh, President at DSP BlackRock Mutual Fund, “On the first impression it hurts the sentiment, as we are always happy with tax free investment options. However, even today, for investors looking to grow their capital over long periods of time, equities remain the most efficient asset class as it offers higher growth and at still lower tax rates vs other asset classes like gold, FDs or Real Estate”.

What impact will the budget have on the future returns of the stocks and what should be the appropriate time duration for healthy returns?

“If we seek evidence on impact of budget on future returns of stocks, the outcome is very random. In the last 21 years, since the budget day, the future one year market returns have seen a very wide range of -47% to a high +102%. This is in line with the randomness of short term returns and confirms no correlation between budgets and future market returns. Equity returns over time are driven by earnings growth and valuation re rating. In the current environment, earnings growth momentum is picking up for good companies across many sectors while room for PE re rating is less as we are at elevated valuations. Hence as investors, we should increase the time horizon of our investments and LTCG introduction will indirectly encourage this trend” added Parekh.

 How should the investor plan his investment options?

“My advice to investors would be to focus on and strengthen personal budgets – earn more, spend less, save more, invest for long time horizons just like the government is strengthening the country’s finances with stable long term measures” advices Parekh.