LTCG: THE GOOD, BAD AND UGLY
"In this world nothing can be said to be certain, except death and taxes"
– Benjamin Franklin
In our Newsletter discussing November 2017 performance titled 'BEWARE OF THE DOPAMINE!!', we had expressed our growing discomfort about investor complacence. This is what we had said:
Even as we are as reassured as ever, about equities as an asset class, we believe this is as good a time as any to to shed complacency and re-calibrate the expectations about the future...
With the Long Term Capital Gain being levied on equity investors and Sensex going down headily the next day post budget, markets have once again shown how unpredictable they are. Before we venture into how to deal with the uncertain markets, let us first list out the 'Good, Bad, and Ugly' about the newly introduced Long Term Capital Gains tax (LTCG) on equity and equity mutual funds...
The Good About LTCG:
- LTCG is only 10% which is on the lower side of regular income tax slabs.
- Grandfathering provision implies no tax liability on LTCG made upto January 31st 2018.
- For a set of people, the holding period might increase as they would like to defer the LTCG as much as possible.
- It does not impact the small investors as LTCG upto Rs 1 Lakh is exempt.
The Bad About LTCG:
- No avenue left for tax-free returns. All future returns to be made from Indian equity markets have reduced permanently.
- Indian equities have suddenly become relatively less attractive (as compared to earlier regime) vs foreign equities as well as other asset classes like Real Estate and Fixed-Income.
- Dividends from mutual funds also will be taxed at the hands of the funds.
The Ugly About LTCG:
- Stock Prices might re-adjust lower on a one-time basis to factor in lower prospective post-tax returns from stocks.
- With only 5% difference in Short Term Capital Gain and Long Term Capital Gain tax, incentive for short-to-medium term investors to stay invested will go down. This might result in more 'speculation' vs 'investing'.
So, what advice do we have for our investors? Well, the timeless principles of investing, which we strive to follow at Inertia, remain as much relevant as ever. Buying the right stocks and holding them for long periods of time has been and will always remain the best strategy for wealth creation. LTCG just provides one more incentive to do so as holding on to profitable stocks lets your tax liability to get deferred even as you benefit from compounding on your full investment...
So what if death and taxes are inevitable, the battle of life is all about postponing them as much as one can, isn't it??
LTCG or not, Inertia remains committed only to long-term wealth creation of our clients.