LTCG On Equities - Simplified

If the new LTCG norms rolled out in last week's budget are making your head spin (what with terms such as 'grandfathering' thrown in for good measure!), this will serve as a much-needed simplified explanation. The new rules apply to stocks as well as equity oriented Mutual Funds, from which the estimated capital gains being booked each year currently amount to a sizeable Rs. 3.6 Lakh crore.

First - understand that the rules for short term capital gains (STCG) remain unchanged - so if you book out today after having held on to your securities for less than 12 months, its status quo; that is, your gains (if any) will be taxed at 15%.

What if you sell your asset after 31st March 2018, having held on for more than 12 months? How are you to compute your gains? Simple. Compare the purchase price (or NAV) of your asset with the closing price of your asset as on 31st January. Take the higher of the two. Subtract your sale price from this number!

For instance, you may have bought an equity Mutual Fund 14 months ago at an NAV of Rs 10. Say, the NAV on 2nd April is Rs 14, and the NAV on 31st January was Rs. 12. Your profit per unit would be compute as Rs 14 minus Rs 12 (nor Rs. 10); that's Rs 2.

If it's a stock you're selling, the 'closing NAV as on 31st January 2018' will be replaced with the 'highest traded price on 31st January'. Everything else stays the same.

For any purchases made after 31st January 2018, the new rules will apply instantaneously. That is, if you buy a security today and sell if 14 months later, you'll need to bear taxes on an LTCG figure that's 10% on your profits.

Taxable profits commence at a floor value of Rs. 1 Lakh per PAN, per fiscal - so your CA will need to calculate the tax payable after factoring in all long-term profits booked in the next fiscal, across your stocks and equity mutual funds, when you file your returns for FY 2018-19.

A 10% DDT (Dividend Distribution Tax) on Equity Oriented Mutual Funds has been proposed too. Since this DDT will likely apply irrespective of whether the total quantum of dividends received surpasses Rs 1 lakh or not, the growth option is likely to become more attractive than the dividend option from a tax efficiency perspective.

Since the amendment will be coming into effect (unless it's shot down!) from the new fiscal, you've essentially got a 2-month window where the old rules still apply. So, should you try to 'hop off and hop on' in the endeavour to save taxes? Absolutely not. This is a move that's fraught with danger. First, tax efficiency should not be the driving factor behind your decision to invest into equities. Second, this will undoubtedly lead to you trying to 'time' your entry back; something which is most likely going to yield subpar results. Most countries do, in fact, have a tax on LTCG in place (barring just five, globally), so this move was actually an inevitability at some point. If you're a serious equity investor, stay put for the long haul without worrying too much about the tax-efficiency aspect.