Frquent trading and short term investment will definately affect return by
A…Inrease tax payment
B…Reduced invested capital (tax amount is deducted from capital)
I have tried to explain in detail as below.
Effect of taxation on return
(Short term v/s long term investor)
Lets take example
1 cr invested for 10 yrs @18% cagr return
Person A will invest 1 cr for 10 yrs
and will pay 12.5 % longterm capital gain tax at the end of 10 yrs
Person B will gain 18% return every year and he will sell stocks every year and will pay 20% short term capital gain tax.He will reinvest remaining amount (after tax) in new stocks
He will follow this strategy every yr upto 10 yrs
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Person A…
-1cr @ 10 yrs@ 18% cagr
-1cr will grow to 5 cr after 10 yrs
-Profit 4 cr
-Tax@ 12.5%@ 50 lkhs tax
-50000000-5000000=4,50,00,000
-So, 1cr into 4.5 cr@ after 10 yrs
-Cagr return after tax@ 16.23%
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Person B
Short tem investment @ selling every 1 yr
1cr @18% return@selling every yr@10 yrs
1st yr
1.0 cr+18% retrun=1,18,00000
11800000-10000000=18,00000 profit
1800000×20% tax=3,60,000 tax
11800000-360000=1,14,40,000
-So, at the end of 1st yr, person B asset will grow from 1cr to 1.18 cr
-He will pay 360000 tax
-He will reinvest 1,14,40,000
-This will be repeated till 10 yrs
2nd yr@
11440000+18%=13499200
13499200-11440000=20,59,200
20,59,200×20%=4,11,840
13499200-4,11840=1,30,87,360
3rd yr
13087360+18%=15443084
15443084-13087360=23,55,724
23,55,724×20%=4,71,144
15443084-4,71,144=1,49,71,940
4th yr
14971940+18%=1,76,66,889
1,76,66,889-14971940=26,94,949
26,94,949×20% =5,38,989.84
1,76,66,889-5,38,989.84=17127900
5th yr
17127900+18%=2,02,10,922
2,02,10,922-17127900=30,83,022
30,83,022×20%=6,16,604.4
2,02,10,922-6,16,604.4=1,95,94,317
6th yr
1,95,94,317+18%=2,31,21,294
2,31,21,294-1,95,94,317=35,26,977
35,26,977×20%=7,05,395
2,31,21,294-7,05,395=2,24,15,899
7th yr
2,24,15,899+18%=2,64,50,760
2,64,50,760-2,24,15,899=40,34,861
40,34,861×20%=8,06,972
2,64,50,760-8,06,972=2,56,43,788
8th yr
2,56,43,788+18%=3,02,59,669
3,02,59,669-2,56,43,788=46,15,881
46,15,881×20%=9,23,176
3,02,59,669-9,23,176=2,93,36,493
9th yr
2,93,36,493+18%=3,46,17,061
3,46,17,061-2,93,36,493=52,80,568
52,80,568×20%=10,56,113
3,46,17,061-10,56,113=3,35,60,948
10th yr
3,35,60,948+18%=3,96,01,918
3,96,01,918-3,35,60,948=60,40,970
60,40,970×20%=12,08,194
3,96,01,918-12,08,194=3,83,93,724
After 10 yrs, person B will have 3,83,93724 after paying tax
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After paying taxes
Person A(long term investor)
-1cr will grow to 4.5 cr@ after 10 yrs
-Cagr return after tax@ 16.23%
-50 lkhs tax
Person B(short term investor)
-1 cr into 3.84cr@after 10 yrs
-Cagr return after tax@ 14.40%
-71 lkhs tax
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Here we have seen example for
1cr invested @18% cagr@ 10yrs
Now,lets take other exapples
1…Effect of invested capital
=Now think, initial amount is 10cr ,
instead of 1cr, then
Person A@ 10cr will grow to 45 cr
Person B@ 10cr will grow to 38cr
2…Effect of return
=If cagr return is 20% instead of 18% then it has more profound effect.
3…Effect of duration
=Same way, if someone is investing for 25 yrs with low turnover ratio (but and sell for 10-20 times ) and other person is investing for 25 yrs with high turnover ratio(50-100 times buy n sell), there will be huge impact of taxation on return
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In conclusion,
If we talk about taxation effect on return( keeping everything equal), short term investor will have reduced return as compared to longterm investor.