A comeback of the Long-term capital gains tax.


The introduction of Long Term Capital Gains (LTCG) on equity was quite a blow to the investors causing a spontaneous reaction to the Sensex. After the proposal reintroduced the LTCG tax, the fears of equity investors came to be true, leading to tumbling of the markets.

Especially, the small investors who shifted their trust from real estate and gold to financial assets, were the ones who got affected.

In the wake of the Budget 2018, a 10% LTCG tax on gains over and above Rs. 1 Lakh. The LTCG on stocks and equity mutual funds was tax-free for a long period of 14 years. Hence, investments in equity mutual funds were a major attraction, especially in the post-demonetisation phase when many funds gave massive returns of about 30-50% in a year.

Below are a few measures in the proposal to avail the benefit of the LTCG as per the following situations:

  1. The new proposal for LTCG policy will only be effective from the 1st of April, 2018. Hence, the LTCG exemption can be claimed, if equity shares of an investor are sold before March 31, 2018.
  2. For all the equity holdings sold after April 1, 2018, LTCG will be exempt from tax only up to Rs.100,000 per annum and as proposed, hence, 10% is chargeable on the long-term gain exceeding Rs.100,000.
  3. One of the most important provision is the grandfathering of gains till January 31, 2018. Gains accrued till January 31, 2018 will not be taxable, hence, reducing the amount of capital gains facing the 10% tax. This has certainly brought relief to the investors.

But, this new rule has raised a lot of questions in the mind of investors. One of them being, are Equity MFs still the best bet?

I believe, for a long-term wealth building, equity mutual funds are still the best path to follow, given their potential to outperform the markets by giving massive returns.

As per the CRISIL AMFI Equity Fund Performance Index for December 2017, equity funds had a CAGR of 35.59% in one year, being one of the best investment vehicles at present.

The impact of LTCG is unlikely on small investors who invest for the short or mid-term through the SIP format.Therefore, a small investor would only pay a small tax only on the non-exempted gains.

The SMART way to reduce your tax liability

There are a few ways to remain under the Rs. 1 lakh limit thereby, lowering your tax incidence. For example, investing in your spouse or child’s name in order to ensure the projected gains remain less than Rs. 1 lakh during redemption.

Check Exit Load & STCG in case of immediate EXIT

If you’ve made a decision to exit your mutual funds, consider these three costs. First, the exit load. For example, many funds charge 1% for redemption within 365 days of investment. Second, check your expense ratio. This would directly reduce your absolute returns. Third and the most important, check the investment tenure. You pay 15% tax on Short Term Capital Gains on equity investments, with a tenure of less than 365 days. All investors can actually wait a little extra instead of paying towards your exit load and five percent more as the STCG, hence reducing your costs.

The Growth Story of INDIA

Indian markets are expected to have great long-term prospects with estimated economic growth projected at 7-8% per annum. The smart strategy of any long-term investor looking for massive returns, should be to not pull out and remain invested. Mutual funds are still the best savings instrument there, and will continue to generate higher long-term returns better than any other asset class. The LTCG introduction should not change the long-term outlook of MF believers and investors.

The initial idea of Equity Mutual Fund investment is long-term wealth building, hence, equity Mutual Funds are still one of the very lucrative investment options from a wealth creation perspective.Therefore, I believe the LTCG is definitely not a deterrent to investment.