LTCG Taxation is in the news again. And the reason is that our finance minister has said the government is open to feedback on capital gains taxation. I am no one, but I have feedback on it too.
I am no one, but I have feedback on it too. 😊
While personally, I would love to see pre-2018 taxation where LTCG was taxed at 0%, I am still fine if Long-Term Capital Gains tax on Equities is removed (or reduced*) and the holding period for LTCG qualification is increased to 3 years. It kind of aligns with what equities as an asset class demands – staying invested for best results. My point is simple. If the aim is to promote long-term behaviour, give incentives like bringing LTCG down to 0% and redefining long-term for equities as 3 years.
*Scrapping the long-term capital gains tax on equities may be difficult for the govt. as LTCG tax on equities brings in decent revenues and, in all fairness, no government would want to give that up easily. So rather than full elimination, reducing it to a small percentage of say 2.5-5% (from the current 12.5%) may also send the right message.
Another option might be to make a tiered approach where LTCG tax from 1-3 years is 10% and is removed completely (0%) for holding periods above 3 years. But this will again make things complex, though desirable and better than what we have today.
I wrote about this when LTCG tax returned at 10% in 2018, and again when it went to 12.5% in 2024. My advice both times was the same: accept, adapt, keep the investments going. It still is. But telling investors to adapt is one thing. Asking policymakers to fix the design is another.
In 2018, I ran the numbers. At 12% a year, a 10% LTCG looks harmless. The CAGR slips from 12% to about 11.5%. But on ₹50 lakh over 25 years, that small slip meant nearly ₹80 lakh less in hand. And that assumed one exit at the end. Real investors switch funds and rebalance along the way. When I tested that, the final corpus fell short of the zero-tax figure by far more than 10%. Every exit pays tax, and that money stops compounding. Those who pay this cost are investors doing the sensible thing, like dropping a dud fund or rebalancing.
Then in 2024, I called the LTCG hike to 12.5% unwarranted. My point then was simple. And I repeat what I said earlier. If the aim was really to promote long-term behaviour, then it made sense to give incentives like a lower tax rate for longer holding periods. I also wrote that the rate would likely keep inching up over the years. A cut would, for once, move the tax in the direction long-term investors have been asking for.
Demands to remove LTCG come up every now and then. But the direction so far has been one way: 0% before 2018, 10% from 2018 to 2024, 12.5% since. Let’s see what comes out of this episode of Bring-LTCG-Down-To-Zero.
But I really hope the govt. does something so that we can forget now infamous lines – Capital gains don’t accrue from any effort (iykyk), and someone finally thinks about rewarding long-term investors by rationalizing/reducing LTCG taxes, if not eliminating them.
My tweet on this topic – link