Agree with the rest of your post but not this one line. Nothing stops a tea seller to become PM if he is elected democratically. Fancy degrees alone don’t guarantee that the person has wisdom… So get out of this elitist mindset.
Just for larger interest…remember the way LTCG tax has been is quite remarkable…
One it provides at least benefit by giving the grandfather effect. Secondly it provide exemption of Rs 1 lakh. Remember the act says it’s on securities (the word security has been used and portfolio is not a security but a basket of securities). So I guess the exemption limit is on individual stock and not on portfolio. Thirdly the Bill clearly says excess of Rs 1 lakh will be taxed and the very mention of no indexation benefit also make it clear that the exemption limit is not a yearly limit and it applicable on the total holding period of individual security. So no question of annual reset. Lastly, the way clause in the Act is drafted the long term capital loss will only arise if one sell the security at price lower than the original purchase price and not the fair market value as on 31.1.2018. Because the cost of acquisition is higher of 1. The actual cost of acquisition and 2. Lower of the fair market value as on 31.1.2018 or the actual selling price.
Going by your theory, if i diversify my holding with over 100 stocks, i will then get 1cr exemption with 1 lac exemption on each stock…
Is that you fair point…?
“LTCG gains of 1 Lakh in a Financial Year are exempted”, no matter you diverse over 10 or just keep on one.
Read the second para where the act says LTCH arising from transfer of A long term capital asset being AN equity share in a company or A UNIT of AN equity oriented fund.
May be Mr.Karthik
I think the provisions designed is bit complex and need some interpretation…Let us all see how it gets implemented and followed over period of time.
One the reasons given by the government in taxing LTCG in equities is that a growing number of investors in equity market are corporates and LLPs and these entities are investing in financial assets instead of investing in their own businesses. I don’t know where this data came from but assuming this is true, this tax in at least one way beneficial for retail investors.
If government’s reasoning is true, currently we are competing with deep pocketed corporate investors who have lower return requirement, lower funding costs and are willing to bid higher in equity markets. If this tax reduces incentives for them to participate in the financial markets, it should make stocks cheaper for rest of us. Most long term investors will recall that just a few years ago stocks were cheap (in hindsight at least).
A true investor wouldn’t want to make money by selling it to a greater fool but by investing in companies that grow their earnings faster than their required rate of return so their stocks become more valuable that way instead of hoping to sell it to a buyer with even lower required rate of return.
I am sure most long investors have been having trouble finding bargains in the last few months. As investors, we should welcome lower stock prices as it allows us buy quality businesses at lower prices. That is true if you are sitting on some cash. Even if you are fully invested, you can always churn your portfolio to take advantage of coming volatility. As long as what you are getting is more valuable than what you are giving away, you should be better off personally.
Isn’t it ironic that past corrections look like lost opportunities but the next one looks scary?
Stock markets are running on very high valuation because earnings have not picked up and the market is optimistic about future…
And taxation will do little for changing this front, the dii money is flowing in and this is just a start…
I fact by bridging gap between the short and long term investors, volumes are going to go up and that is directly proportional to the price movements (either direction)…
With the crude at its peak, earnings shall take a bit of time to recover and the capital absoption by the earnings per share will continue to lag…
I disagree with you on this point , taxation shall have any impact…
And the pe multiple dosnot always expose the value underlying… As much as the financials expose…
Yes, indian markets as of now is not for value investors per say on a average basis, but the growth in earnings are still expected and we can generate enough returns from investment on just the growth drive…
Not sure whether this was discussed above. Posting it from mobile and weak connections, without checking.
I have LTCL - long term cap loss accumulated from yesteryears. These were from the era when FMPs used to give 10% and I had pseudo losses due to double indexation , due to the 1 year rule prevailing then (that too was jettisoned by Jaitley in his 1st budget to 3 years and these indexation benefits were substantial, before the era when govt started ‘managing’ the CPI index too),all are pseudo losses and sitting in return and the 8 year carry forward will help
Question is- can I use this LTCL to set off this LTCG from equity and equity MFs? I think common sense says Yes but in my life, I am yet to see common sense and Govt having any semblance of overlap !!!just like one of the doctor’s post above, I had to sacrifice a lot to get to where I am today and mind you, it’s not very high. So far, I have got almost nothing from any govt and believe me, this 10% is a start. They will throttle it whenever they come up with something else , just to keep them in power. And mind you, it’s not mere 10%. Let’s say if u r just in the border of draconian surcharge, it’s much much higher. Just when you think that your retirement is secured, here comes one more gulliotone to cut one more finger. And imagine the paper work from this irksome computation. Anyway, as long as we are not capable of making it to vote relevant group, this is how we will be trashed.
Looking for answers on set off Question.
Thx a ton in advance
Imposing LTCG…to scare some investor away from savings to think of other avenues…which will in turn increase consumption? So that govt thinks to make growth of it? Or this will also pass as a noise few months down the line? everyone wants correction…but when it comes… people are scared to pump more in fundamentals strong scrips as many think it will fall further
On the flipside, which is more closer to reality, there is no hope that government is going to work for you.
Meaning, 31st Jan 2018 rates are going to be the highest for the long term.
The way of introducing LTCG is very interesting. Why exclude people who have made crazy money from a little taxation, unless they are your own?
Over the last year and more, it is the retail investor who, via SIP had been investing money into equity mutual funds, who accounted for some of the largest inflows into the markets.
Further Corporates, investing in stock markets have to pay tax on LTCG (because they have to pay MAT), similarly LLPs have to pay taxes when partners redeem. So they are already taxed on LTCG!
So the stated logic is flawed.
However, taxing LTCG is a welcome move in one key respect for retail investors; it makes fixed income instruments relatively attractive again. Taxing fixed and certain income much higher than uncertain income, magnifies post tax returns for the latter substantially. During a period of substantially rising stock markets and falling bond markets, like last year, it nudges otherwise prudent investors to become blind to the risks that come with stock investing…leading to an extremely unfortunate end when the collapse happens.
With tax on LTCG, some tax imbalance gets restored. Of course STT should have been removed. Zero LTCG tax on listed equity for 14 years may have created a half generation of listed equity investors who naturally may have taken it for granted. But those who have multiple sources of capital gains (say gains from selling unlisted equity) or old enough to know Govt behavior and old LTCG tax rates, would have known that these are ultimately temporary. We all invest for longer than Govts have their terms.
But there is a bigger tax anomaly that has crept in while LTCG tax was held at zero. That is the Dividend Distribution Tax and additionally, tax on dividend income more than 10 lakhs. Over time 20% of distributable profits belonging to shareholders, and taxes paid for, are again taxed when giving it to shareholders. It will 25% for someone who earns say a Rs 20 lakh income from dividends. This created two shifts; one, shareholders would increasingly not hold stocks for dividend but for capital gains. This was accentuated by zero LTCG tax. This behavior has resulted in stock prices moving faster than rise in dividends, with dividend yields hovering around 1%, even while long terms risk free rates were between ~ 6% and 7.5%. Quite the inverse of most markets. Two, corporates held back increases in divdend payouts and retained excess capital within the firm at far lower returns, thus depressing RoEs. I had written about it some time back here. The valuation leak we ignore is worsening.
So at the end of it all, investors end up with the old LTCG tax, and now STT, exhorbitant DDT and tax on dividend income!
IS IT NOT THE TIME TO MOVE ON FROM PAST ANALYSIS TO…
WHAT KIND OF BEHAVIORAL CHANGE THIS LTCG CAN INDUCE.
HOW TO BENEFIT FROM SUCH CHANGES.
WHAT SHOULD BE ONE’S STRATEGY TO HANDLE OWN PORTFO/ASSET ALLOCATION.
ANY TRICKY SITUATION AS A RESULT OF NEW TAX N REMEDY. Etc…
I was searching for different scenarios which can easily help all including investors from non-financial background as well. Hope it helps others like me
The new law will move money out of the markets in a certain percentage. This money is most likely to go to safe deposits. This will support the banking system.
Much has been done to flush the banking system with more and more money. Demon and now LTCG. Banks get low cost funds, to give low cost loans. This in turn supports the economy.
Just the share prices climbing does not do much good for the nation which is on the verge of a economic explosion. For that the nation needs leadership with a vision, and loads of money to fuel the vision.
Infact i raised query earlier for likely scenario 2 & 3. Though it was lost on many emotional lead LTCG analysis.
How do v confirm your interpretation to be right. Though by natural law it should be.
While we all are adversely impacted due to imposition of LTCG, I would like to present an alternate hypothesis.
It’s is always possible that in future, LTCG is removed again or at least made more favorable. It would benefit investors to have bulk of their equity investments in quality assets which can be held for longer term. This would allow for such a future event to reduce the tax outgo
Even otherwise, investing in quality assets is always a better option. As investors, we will need to work harder to identify them.
Indexation will come. But will you take it? If govt. says either pay flat 10% or 20% with indexation, then it will take at least 5-10 years for 20% with indexation clause to trump the benefits of 10% flat. Which means govt. has 5-10 years to bring indexation clause. So Chill! And please don’t insult chaiwallahs. We have seen how the country was run by Harvard and Oxford educated geniuses working under the leash of (highly educated??) MadamG.
This is a very valid point. Based on what I have read over the last few days, govt does want to remove imbalances including STT, DDT, double taxation etc. However, they also have to address ease of collection and ease of avoidance. STT and DDT being indirect taxes are easy to collect and difficult to evade. LTCG Tax being a direct tax is difficult to collect and relatively easy to evade. Now we will have a situation where honest tax payers will pay while evaders will get an unfair advantage by evading it. some honest tax payers will switch to the dark side just by watching others who evade.
Emerging economies rely more on indirect taxes like GST because these are relatively easy to collect while developed economies rely more on direct taxes which are fair and progressive but it needs greater compliance and enforcement. Until tax compliance goes up in our country (which can take decades, if at all) we will have a confluence of various tax structures.
Is there any amendments proposed to (1) Bring indexation for LTCG & (2) Reduce LTCG rates to 7.5%? I heard ex FM say something like this in an interview to CNBC TV18 (need to confirm though)