LTCG tax and its impact on your clients investments

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?

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

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.