InvestorQ : Can you explain the real impact of the LTCG tax on equities in a simple manner?
Mary Joseph made post

Can you explain the real impact of the LTCG tax on equities in a simple manner?

Answer
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sara Kunju answered.
1 year ago


Obviously, the attractiveness of equities as an asset class will reduce. Let us understand how big the difference will be after you consider the impact of tax on LTCG under two different holding period assumptions. But, how big will be the impact of this LTCG tax? The illustration below captures the actual impact over a 15 month holding period and over a 50 months holding period. It really gives you a perspective of how the CAGR yield differential compresses once the time period is extended.

Particulars of transactions

15 month holding period

Particulars of transactions

50 month holding period

ABC Ltd. buy date

Jan 01, 2018

ABC Ltd. buy date

Jan 01, 2018

Number of shares

1000

Number of shares

1000

Buying Stock Price

Rs.745

Buying Stock Price

Rs.745

ABC Ltd. sell date

Apr 01, 2019

ABC Ltd. sell date

Mar 01, 2022

Holding Period

15 Months

Holding Period

50 months

Selling Stock Price

Rs.1,085

Selling Stock Price

Rs.2,295

Buy Cost

Rs.7,45,000

Buy Cost

Rs.7,45,000

Sell Value

Rs.10,85,000

Sell Value

Rs.22,95,000

LTCG Gains

Rs.3,40,000

LTCG Gains

Rs.15,50,000

Profit percentage

45.64%

Profit Percentage

208.05%

CAGR Returns

35.09%

CAGR Returns

31.00%

Now let us consider returns in the post LTCG tax scenario

LTCG Gains

Rs.3,40,000

LTCG Gains

Rs.15,50,000

Effective Tax on LTCG $

11.648%

Effective Tax on LTCG $

11.648%

Post Tax Profit #

Rs.3,00,397

Post Tax Profit #

13,69,456

Post Tax Sell Value

10,45,397

Post Tax Sell Value

21,14,456

Post Tax CAGR (%)

31.10%

Post Tax CAGR (%)

28.90%

# - For the purpose of simplicity, we have assumed that the limit of Rs.1 lakh for exempt LTCG is already utilized elsewhere, so the entire LTCG in this case is taxable…

$ - The tax rate on LTCG is 10% but the effective tax rate works out to 11.648% if you add up the surcharge and the 4% cess effective from this year

This is really puts the impact of LTCG tax in perspective. If you are worried about the impact of the LTCG tax, you can actually afford to relax! We have considered two scenarios where an investor makes LTCG after a holding period of 15 months and 50 months. In the first case, the CAGR return is lower by 4% when the impact of LTCG tax is considered on the eventual wealth creation. On the other hand when the 50 month time frame is considered, the CAGR returns falls by just about 2% post tax. So as your holding period gets longer, the actual impact of this LTCG tax on your CAGR returns will be quite negligible. In fact, as you go towards a holding period of 15-20 years (which is what your financial plan is typically about) the actual impact is just about 40 basis points. So much for the worry over LTCG tax impact! So, to answer your big query, it will not make any substantial difference to your long term financial plan.