Long-Term Capital Gains (LTCG) Tax in Equity has been increased to 12.5% (from earlier 10%) in the Budget 2024. So, the 10% era existed from 2018 to 2024. The earlier pre-2018 era was about the good old days of 0% LTCG tax!
Long Term Capital Gains (or LTCG) arising from the sale of equity shares and equity mutual funds will be taxed at 12.5%, if total the capital gains in a year exceed Rs 1.25 lakh – this is what the new rule is.
To be fair, when looked at in totality across different asset classes, holding periods and the changes announced, the capital gains taxation had become simpler.
However, an increase in the LTCG taxation isn’t exactly positive if we were to be honest about it.
I would love to go back to the pre-2018 days of 0% taxation. But if not that, then the 2018-2024 era of 10% taxation was better than the new 12.5% era.
Of course, the increase of 2.5% extra may not seem much. More so when you see that the first Rs 1.25 lakh gains are tax-free (which has been increased from earlier Rs 1 lakh per FY).
Markets and investors will adjust and move on. But this isn’t exactly a good move. I don’t want to add more and say anything about how I feel as I know that you know what I want to say about this development.
The government and the regulator have time and again said that they are worried about the increase in the increase in trading participation over the last few years and hence, would want to see some sanity return to the space. And they did increase Short Term Capital Gains tax from 15% to 20% (on gains made under 1 year), STT on Futures from 0.0125% to 0.02% and that on Options from 0.0625% to 0.1%.
But the increase of the LTCG tax was unwarranted in my humble (and of course biased) view. If the idea is to promote long-term behaviour, then better to give incentives like reducing the tax rate for longer periods of holding.
However, there is no point in this rant, to be honest. The government has decided what it has and we have to accept and move on. And that is what we do.
But what this means for the future is worth discussing.
Here is what is happening if you try to connect the dots.
The government is promoting the new tax regime which is simpler and offers lower tax rates compared to the old regime. Most people who belong to the 30% tax bracket, in reality, have an effective tax rate of about 20% after all deductions etc. and taxation of reduced taxable income. Now, on the other hand, the LTCG has increased from 10% to 12.5%. And I think chances are high that over the next several years, this will keep inching upwards and towards 20% eventually. So a time may come when effective income tax rates and LTCG tax rates may be around the same level. This is just a speculation but nevertheless, the current trajectory of tax changes hints at this scenario if things continue as they are.
So if the future holds more taxes for us, then what should we do?
I think you know the answer.
If you are a Goal-based Investor (and you should be one!), you need to account for the possibility of future adverse tax moves by the govt. and build buffers in your calculations accordingly.
I have already been doing this for my clients for years via Financial Planning service, and I am sure many other advisors would be doing this too. But if you don’t, then it is time you give this issue the importance it deserves.
Investors need to factor in an additional tax burden (now as well as those that might come in the near future) on equity investments when planning their financial goals.
Many investors and me included, run SIPs to meet their life goals — retirement (or early retirement), children’s education, travels, house purchase, etc. So with new changes, the investors will need to save a little more to meet their financial goals, as money left in hand after paying LTCG tax will be slightly less.
But all said and done, the current increase in LTCG tax may have a near-term negative sentimental impact, but it still won’t wreak havoc in the long term as things stand now.
With or without (increased) taxation, equity is still the best bet for retail investors in the long run. There is no denying that.
People were perfectly fine paying much higher taxes on much lower returns from FD and other assets. So, this move may have made equity a bit less attractive for the time being. But for long-term inflation-beating returns, equities need to be a major part of any sensible investor’s core portfolio.
Earlier, the long-term investors had the luxury to switch from one investment to another every year (if need be) at 10% cost. But now, this luxury will cost them slightly more at 12.5% of their returns. Over time and depending on the number of such switches, the tax-related costs will add up. So ideally, this should make investors much more disciplined and avoid unnecessary exits and think twice before churning or rebalancing unnecessarily. So we don’t know but it is possible that people will avoid exiting investments in a hurry now to defer paying (increased) taxes – so in a way, it may bring in a sense of long term’ness’ in the investments being made.
I think I have already added to the noise surrounding the increased 12.5% LTCG tax and its impact on long-term returns from equity.
🙂
My apologies for that.
To summarize, LTCG is the new reality which no doubt is a negative for investors. But my advice is to accept, adapt and move on.
Equity still offers the best inflation-beating returns, even after all the taxes and has the potential to outperform returns from most other savings and investment options.
Good, sensible and disciplined investing will take care of all such similar issues that come up every now and then.
Being a SEBI-Registered Investment Advisor, I can confidently say that instead of worrying and getting confused about things that cannot be controlled, investors should simply concentrate on their financial goals and keep investing (now a little more) in a disciplined manner through systematic investment plans (SIPs) and for the long term.
Disclaimer – The views expressed above should not be considered professional investment advice or advertisement or otherwise. No specific product/service recommendations have been made and the article itself, is for general educational purposes only. The readers are requested to take into consideration all the risk factors including their financial condition, suitability to risk-return profile and the like and take professional investment advice before investing.