LTCG Tax on Equity: Demystifying Investors' Concerns
Source/Contribution by : NJ Publications
Since the announcement of LTCG tax on Equity, the markets have not quite settled, and so the investors. You must have been pestered with questions by now, “Do I have to pay a tax on my Investment now?” “You said I'll get tax free Returns?” “Should I sell my investment, so that I don't have to pay any tax?”, and the like. The minds are blocked by perceptions because every newspaper and TV channel has a different story to narrate, which is also the primary factor behind the hype.
How do you answer the questions, and explain the impact of the announcement on the investor's investment is the major challenge at this point of time. It is crucial to give a satisfactory response and demystify the investor' apprehensions,
What's the New Law
Long Term Capital Gains (Investment period > 1 year) of above Rs 1 Lakh from Equity stocks and Equity Mutual Funds, will now be taxed at 10%, which was fully exempt earlier. However, the gains made until 31st Jan 2018 will be grandfathered, meaning the capital gains made on the investment until 31st Jan 2018 will be exempt.
Tax Calculation: Amongst the most asked questions by clients at this point, is the tax calculation part. How will the grandfathering work? How much tax will be due on existing equity investments? How about new investments?, etc.
We have the following illustration, which shows the LTCG tax impact on an investment made in an Equity Mutual Fund on different dates, this will help you in solving a lot of queries:
Assumptions:
Investment Value on 31st Jan 2018 (Grandfathering Date): Rs 5 Lakhs
Redemption Date: 1st May 2019; Value on Redemption Date: Rs 620,000
| Investment Date | Purchase Price (Rs) | Gross Gain (Rs) | Gain after 31st Jan 2018 (Rs) | Exempt (Rs) | Taxable Gain (Rs) | Tax @ 10%(Rs) |
| 1st Jan 2016 | 400,000 | 220,000 | 120,000 | 100,000 | 20,000 | 2,000 |
| 1st Jan 2017 | 450,000 | 170,000 | 120,000 | 100,000 | 20,000 | 2,000 |
| 1st Jan 2018 | 490,000 | 130,000 | 120,000 | 100,000 | 20,000 | 2,000 |
| 1st May 2018 | 510,000 | 110,000 | 110,000 | 100,000 | 10,000 | 1,000 |
So, the above table shows that investors do not have to worry about the gains they have made historically, since all gains made prior to 31st Jan 2018 are tax free. As we see in the table above, in the first case, on a total gain of Rs 210,000 made over 2 years, the tax liability comes to just Rs 2,000. Also, long term capital gains made after the grandfathering date, upto Rs. 1 lakh, will be exempt.
Focus should be on the Goal: Further, it's not just about tax, the investors must realize that they invested in Equity Mutual Funds with a goal in mind. If they are being skeptical about their investment, ask them if they have fulfilled the goal, if not, how do they plan to provide for the goal? Urge your investors to not go astray. If their goals are still far way, they don't need to worry about tax, rather they should stick to their investments.
Another stance of volatility: You might have nervous investors, especially the ones who may have lately started an SIP, they might not be able to digest the falling NAV's for they aren't yet accustomed to the ups and downs of the market. These investors must be reminded of the inherent volatile nature of Equity markets, you have more than a three decade history packed with instances where markets have dwindled to some news or the other, like this time it's LTCG tax, but it was only a temporary phase, because in all the cases, the markets regained, without fail.
Handholding: The investors need your support at this point of time, if their doubts remain unresolved, they might end up exiting equity and succumb to products which may not conform to their risk profile and investment needs. You lose a client and they might lose a good investment.
To conclude, the cause of the confusion and panic can be largely attributed to lack of clarity. The investors are not likely to go anywhere just for a 10% tax on returns, because there is no other asset class or investment product which can still match Equity, in terms of returns. However, it's important that the investors should not be left to themselves wondering about the connotations of the new tax, they should be explained the impact of the tax with concrete examples, plus they should be reminded of the rudiments, the reason behind investing is not tax saving, but creating wealth and fulfilling goals.
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