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Edelweiss Insights LTCG tax and its impact on your clients investments

LTCG tax and its impact on your clients investments

To harness the true value of equities, one must stay invested for the long-term and let the investment grow.
Edelweiss Feature Jun 20, 2018

Long term capital gains tax on equity investments

• A long-term capital gains tax of 10% is applicable to equity investments for returns exceeding Rs. 1 lakh.

• This is applicable only from March 31, 2018. Additionally, gains accrued till January 31, 2018 will be grandfathered, which basically means that gains made up until that point will be exempt from LTCG.

How does this work?

Investment (Equity) cost one year ago

100000

Value of investment on January 31, 2018

110000

Investment sold on April 1, 2018

125000

Total gains

25000

Gains for the purpose of calculating LTCG tax

15000

Tax at the rate of 10%

1500

Above table is for illustration purpose only

LTCG – Impact on returns

Illustration of the impact of LTCG on an equity investment of Rs.2 lakh which grows at a 15% CAGR

Holding Period

Value of equity investment on redemption (INR)

LTCG (INR)

Tax @ 10%

Post Tax Returns (CAGR)

1 year

230000

30000

Nil

15.00%

5 years

402271

202271

10227

14.41%

7 years

532004

332004

23200

14.27%

10 years

809112

609112

50911

14.26%

15 years

1627412

1427412

132741

14.35%

20 years

3273307

3073307

297331

14.45%

25 years

6583791

6383791

628379

14.54%

As we can see from the above illustration, in most cases, the impact of LTCG tax on equity returns is marginal. As the holding period increases from 10 years to longer duration, the impact becomes minimal.  

Dividend distribution tax on equity mutual funds

Dividends in equity mutual funds now attract a dividend distribution tax of 10%, which is relatively lower than the 25% tax that dividends from debt funds attract.

To harness the true value of equities, one must stay invested for the long-term and let the investment grow. Withdrawing cash in the form of dividends might not necessarily serve that purpose. Hence, for investors in equity mutual funds who are looking to capitalise on the long term value of equity investments, the introduction of these taxes will have little or no impact.

 

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