I am not sure that the Finance Minister reads my blog…nor do I like to tell others what they should do. He has a job to do and he should do it.

If I have no job or my job is to write a blog,I should do that. I hate saying this…but I will.

The Long term capital gains tax that too without indexation is nothing short of a fraud. It is a tax on inflation – which the government should control. If you must have taxation – in both equities and in NPS – I would want indexation to be introduced asap preferably with effect from 2015.

If a fund is not doing well and an investor has invested Rs. 20,00,000 in that fund over 200 months (x 10000 a month) and he realizes that the fund is not doing well, how does he switch to another fund?

Assume it is worth Rs. 2 crores today…he will pay a whooping tax JUST for seeking efficiency in his fund management skills. This is GREAT for old fund houses which have accumulated aum and are sitting with inefficient fund management skills. The cost of fund management or efficiency will not be a consideration.

See what Dhirendra has to say on the topic…

https://www.valueresearchonline.com/story/h2_storyview.asp?str=46503

  1. True, it should have been LTCG with indexation. Expected a correction in this budget. Even a switch from a Regular to Direct scheme should have been exempted. ULIPs gets a different treatment. Why make it complicated?

  2. Hi Subra sir,
    Completely agree with you sir. However, if you permit, there are some arguments for this .. Pls advise if you think it is wrong –

    1. LTCG applicable for gains in excess of Rs. 1 lakh
    2. The tax % applicable is only 10%. (as opposed to other assets taxed at 30%. So indexation is factored in)
    3. Now, one can also c/f Long term Capital losses and set it off against gains.

    elaborating (1 – 3) :
    A small investor with 10 Lakhs capital in shares earns 10% in LTCG it is still tax free for him. It is applicable to lots of small investors.
    A big shark with 10 Crores making 10% in LTCG (1 Crore profit) has to pay tax @ 10% (10 Lakhs) and still gets to keep the rest (90 Lakhs). Isn’t it logical he should pay for the country? In US and other countries one would have to @30%. Besides, the ultra-rich Bachans and Kohlis are paying for income arising from other income tax heads..

    Lastly, earlier one invests in a dud-share (mistake – everyone makes them), he had less time (less than 1 yr) to assess that fact. In case he incurs LTCL loss he couldn’t c/f his losses and LTCL loss was a sunk loss. But now, one can set it off. and c/f for 8 years time frame…
    I’m not sure of this just asking: if one invests in debt instrument (100% debt and 0% equity) and keeps it liquid for 3 years+ he can claim indexation benefit. Even after claiming indexation, if there is amount that he has to offer to income tax (it is subject to tax), from LTCG arising out of the gains of this liquid fund (debt instrument) can this not be set off against the loss made from the LTCL from dud-shares? Both are market instruments.

  3. It is a perfectly fine tax. Since we have income tax without indexation, I don’t see why we can’t have LTCG without indexation. Reg the switching funds example, the investor will have to pay lesser tax the next time since the gains will be lesser after switching. I don’t see a problem there as well. I am myself heavily invested and I have no problem with the tax. The only issue is that some people do not want to pay tax.

  4. @ SS, Subra Sir clearly stated that small SIP investor in equity MFs had accumulated decent corpus over many years want to switch over due to poor performance of the fund is getting a punished. If the corpus results in 1 Crore profit after 25 years of SIP, 10 lacs deduction will hurt small SIP investors who are investing for long term such as retirement. Equity is meant for long term and yearly LTCG exemption of 1L does not benefit small investors in any manner.

    If NDA-2 comes back to power and this party might not last longer. Tthey might rethink on exemptions given in this budget such as ‘notional rent’ etc. Personally I felt CAD will widen and might accelerate ‘rupee depreciation’.

  5. Hi Krish,
    Agree with you (& subra sir) on this point perfectly. Excellent point Krish..

    If a small investor accrues gains over time and corpus grows big. Then, at a later point of time should the switching or spotting of new opportunity be ‘all of a sudden’ and ‘switching is done at once’, on the entire corpus, then the investor stands to lose to tax LTCG.

    Couple of things one can think of is – one can resort to do SWP in withdrawal years to switch so that tax exposure is minimized.
    Second is with today’s tax-slabs we cannot estimate the future year’s (25 years later) tax slabs that will exist when the small investor’s corpus grows from 10L to 10 crores and he wants to switch. The income tax slabs also grow in that direction. (eg. compare IT slabs 25 years back and a person invested 5000 Rs those days)..
    If small investor’s corpus has given him fabulous returns that it beats the pace at which inflation and IT slabs grows, then why would he switch? and if he insists to switch (any reason), then he has grown rich fast already and he has to pay tax (@10% with no indexation) on the excess pace at which he outperformed. that is fair right? In all the years where the small investor has delayed the gratification for future use, income tax has not taxed him all those years either. (this is a principle of income tax that they wouldnt tax you on PF etc where you are postponing your income for a future date locking it away in some asset which is expected to grow in value)

    Imagine in case of any other asset classes like RE and Gold which are treated / taxed on sale (@30% with indexation) already, isn’t it? Why would equity investments a special case?

  6. @ SS, Why are we suggesting SWP. An investor who is near to retirement might want to switch to debt funds all at once or there could be some personal emergency which required substantial withdrawal. Question is why pay 10% LTCG?. Also am confused why are we jumping into IT slabs. Let’s focus LTCG on equity. It is quite unfair without indexation and govt still seems in the mind that it is fair tax.

  7. The equity investment is always considered as ‘inflation beating’ product as compared to any fixed income product. Does this obviously mean that the inflation is already ‘factored’ in the equity returns and hence indexation is not required?.

  8. Is anyone seeing a Http Page not found 404 Error while trying to post comments here? i am seeing this today.. Also some of the posts are not reflected immediately on this site after posting.

  9. Hi Kris, Respect your thoughts. Let me explain:

    Suppose a person buys Gold Rs 1 Lakh in 2008 and gets 15% return sells it in 2018 for Rs 4 Lakhs.
    The CII in year 2008 is 137 and in 2018 is 280. Therefore, cost of acquisition is 1L x (280/137) is 2 Lakhs.
    Tax at 30% is on 4L-2L. LTCG is 2L. So, tax at 30% is Rs. 60 K

    Suppose a person buys Equity Rs 1 Lakh in 2008 and gets 15% return sells it in 2018 for Rs 4 Lakhs.
    Suppose grandfathering provision is not there and tax was applicable for 10 yrs back..
    Suppose there is no indexation benefit. Tax at 10% is on 4L-1L is on 3L. Tax at 10% is Rs 30 K
    But hey, tax is applicable only if it is more than 1 Lakh. So, LTCG is 3L-1L is 2L. Tax at 10% is 20 K

    Of course, Tax is not zero. If you claim that you can get more than 15% returns, say 25% cagr, then your cost of acquisition becomes very small in comparison, and your gains become large. And on top of that you must pay Tax at 30%. Whereas without indexation, at 10% the Tax outgo will be lesser.

    Small investor: If your ‘only’ source of income is this and you are doing a SWP,
    Then income tax slabs like 0-2.5L : nil tax. It will shield your tax outgo to some extent as well.
    In 2008, the 0-1.1 L was nil tax bracket. (that means a growth at 9% when seen in 2018).
    So, in 2030, slab can become 0-6L : nil tax. That will buffer the small investors gains at point of sale.
    Also, the 1L LTCG exemption on equity sale rule is in 2018. In 2030, it may be 3L.

    Please reply if I am missing anything.

  10. @ SS Guess some concepts misunderstood

    Long term capital gains are taxed at the rate of 20.6 % with indexation. So under long term capital asset, benefit of indexation is available plus the person who fall in the tax bracket of 30% also get the advantage of paying the lower tax rate of 20%. I am not really sure why you have taken 30% LTCG on Gold for computation.

    If you calculate 20.6% with indexation for Gold & RE, 10% flat LTCG on equity almost comes the same. So LTCG 10% on equity is at par with other Asset class. The horrible part is ‘equity’ is classified as risky Asset compared to other assets and LTCG is same which is unfair.

    Even retiree salary income is zero, retiree need to pay 10% LTCG on Equity Profit (>1L) which is unfair. LTCG will not be clubbed with Pension, FD interest or Salary income.

  11. Hi All, The special character for ‘equal to’ is not considered in the comments, I think. So we get https 404 error.

    Hi Krish, I stand corrected about the rate. LTCG rate is 20%. So here Gold calculation 60K is 40K. But still, it is 4x the 10K tax computed for equities.
    On Retirees, Can you check this site –
    https://www.incometaxindia.gov.in/Pages/tools/income-tax-calculator-234ABC.aspx
    Enter AY as 2018-19, Male, Resident, Capitalgains show details LTCG put 250000 in any one of the boxes in the 20% section (3rd row) and press Calculate. Do yo get any tax?
    See the site:
    https://www.incometaxindia.gov.in/charts%20%20tables/cost-inflation-index.htm
    2016-17: 264, 2017-18: 272, 2018-19: 280. What is the % increase? 2%-3% is the indexation benefit isn’t it?

  12. The impact of LTCG
    post tax return after a year is approximately 90% of return (for example post tax return of 14% is 12.6%)
    post tax return after 5 years is approximately (return-1%) (for example post tax return of 14% is 13%)

  13. Hi Subra,

    I totally agree with you. I was expecting the same article from you when LTCG tax was announced.

    Thanks
    Barun

  14. @ SS, you are right. I am not really sure why it was not computing for 200K. But for 400K, IT calc is working. LTCG is different from Salary & Other income. Bit strange.

    With 10% flat rate without indexation, LTCG equity is made at par with other Asset classes. They have assumed equity also low risk as that of other assets. This principle set by the Govt in the last budget is wrong.

  15. Krish, LTCG has a different tax treatment compared to Salary and other income. you are right. But, it starts only when the income becomes ‘taxable’. For this to happen, the total income has to exhaust the slabs of nil income & 5% income slab first. That is why slabs are important and I mentioned in earlier comments. You can cross check against income tax’s excel sheet utility also. It is not strange.

    If you think Equity is risky, Gold is risky. (See the gold’s poor returns since 2013). Real estate is risky (illiquid and fraud developers), FD is risky (inflation and tax). Indexation is not an attraction for a few years now 2015-2019 allowing 2-3%. See the other link of income tax department in the above comment.

    The real tragedy is crores of Sr citizens invest in FDs and irrespective of maturity date, they are taxed on the interest earned (without indexation benefit) under other source of income head. Anyways, good learning for both of us. Please do not hesitate to reply on factual arguments to my comments 🙂

  16. “If NDA-2 comes back to power and this party might not last longer.”

    Hi Krish, speaking as a long term investor with more than 1 cr in the stock markets, I’m just as affected by LTCG as anybody else. But if NDA does NOT come to power, LTCG will be the least of our concerns. The problem is when things are running smoothly, people nitpick on minor issues such as LTCG. But when things are bad, even when really bad things happen, even if you say something, cry, whine or complain, nobody will care, because everyone will be equally desperate. Yes, I am happy paying LTCG, and I am happy paying any damn tax as long as NDA comes to power. If they don’t, well, Google search “Venezuela Crisis” and how it all began. We talk about inflection point in the economy, the Indian economy has hit that. But if the crooks from the UPA come to power, what we will have is a reverse inflection point. Don’t say you haven’t been warned.

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