Dont Let LTCG Tax Impact Your Equity Allocation
The finance minister presented Union Budget 2018 in the parliament amidst high expectations all around. However, it turned out to be an election budget with a clear focus on political considerations. While the budget will boost investment in rural development, education, healthcare and social sectors, it did not offer much to the salaried class, investors and corporate India. The slippage on fiscal deficit front also caused disappointment to the market players. The finance minister has pegged the fiscal deficit for the next year at 3.3 percent, which is higher than the earlier 3 percent goal.
Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors
Investors investing in the stock market directly and through equity funds got a jolt in the form of a 10 percent tax on long-term capital gains. The finance minister has also introduced a tax on dividend paid by equity-oriented mutual funds at the rate of 10 percent. While reintroduction of the LTCG tax is likely to dampen the spirits of investors, they will do well not to shun equity and make abrupt changes in their asset allocation.
Before we analyse why these changes should not come in the way of one’s asset allocation process, let us address a number of doubts/questionsthat have emerged in the minds of investors regarding the proposed LTCG tax, its applicability and how it will impact their investments in the stock and equity funds. For mutual fund investors, the impacted funds will be those that have an exposure of 65 percent or more in equity and equity-related instruments
The LTCG tax of 10 percent proposed in the Union budget 2018 will be applicable on long-term capital gainsexceeding Rs1 lakh arising from either transfer of listed equity shares or redemption of mutual fund units on or after April 1, 2018. The LTCG will be computed by deducting the cost of acquisition from the redemption amount. However, any LTCG accrued till January 31, 2018 will not be taxed. Besides, if long-term capital gains are realized up to March 31, 2018, no LTCG tax will be applicable. In other words, any long-term capital gains realised during FY 17-18 will not be taxed.
The cost of acquisition for the long-term capital asset acquired on or before January 31, 2018 will be the actual cost. However, if the actual cost is less than the fair market value of such asset as on January 31, 2018, the fair market value will be deemed to be the cost of acquisition. Further, if the value of consideration on transfer is less than the fair market value, the full value of consideration or the actual cost, whichever is higher, will be deemed to be the cost of acquisition. In case of a listed equity share or unit, the fair value would the highest price of such share or NAV of the unit on January 31, 2018. The holding period will be calculated from the date of investment.
Long-term capital loss arising from transfer made on or after April 1, 2018 will be allowed to be set- off against any other long-term capital gains and unabsorbed losses will be allowed to be carried forward to subsequent eight years for set-off against long-term capital gains.
As is evident, LTCG tax of 10 percent will impact what you get to keep after the completion of your defined time horizon. Considering that equity investments are allocated to long-term goals, tax efficiency of returns is an important aspect as one aims to build a large corpus. However, too much emphasis on LTCG tax may harm your chances of creating wealth. The fact is that equity remains potentially the best asset class to enable you to earn positive real rate of return and hence should continue to play a dominant role in yourlong-term portfolio.
Besides, considering that capital gains accrued up to January 31, 2018 have been grandfathered, youwill do well to avoid making any abrupt decision with regard to realising long-term capital gains with paying any tax. By investing carefully in funds that display consistency both in terms of returns as well as following their investment philosophy and remaining committed to their time horizon, youcan still benefit tremendously from the true potential of this wonderful asset class.