InvestorQ : What will LTCG on equities hit more; my eventual corpus or my return on investment (ROI)?
sara Kunju made post

What will LTCG on equities hit more; my eventual corpus or my return on investment (ROI)?

Answer
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1 year ago


Once thing is crystal clear here! You will end up paying 10% tax on LTCG when you redeem your equity fund corpus. We really do not know what will be your corpus at the end of 20 years but we can surely estimate. We also do not know whether the LTCG tax will be in existence at the end of 20 years. If it does not exist there is not much to worry but if it does exist, then you need understand the implications. Let us look at how your returns and your CAGR returns will look like in the two scenarios…

Pre LTCG Tax

Amount

Post LTCG Tax

Amount

Retirement SIP monthly

Rs.10,000

Retirement SIP monthly

Rs.10,000

Tenure of SIP

25 years

Tenure of SIP

25 years

Invested in

Equity Funds

Invested in

Equity Funds

CAGR returns

14%

CAGR returns

14%

Amount Contributed

Rs.30,00,000

Amount Contributed

Rs.30,00,000

Final Corpus

Rs.2,72,72,777

Final Corpus

Rs.2,72,72,777

Long Term Capital Gain

Rs.2,42,72,777

Long Term Capital Gain

Rs.2,42,72,777

Basic Exemption

Not Applicable

Basic Exemption

Rs.1,00,000

Taxable LTCG

Not Applicable

Taxable LTCG

Rs.2,41,72,777

Tax on LTCG

Nil

Tax on LTCG at 10%

Rs.24,17,278

Net Corpus on hand

Rs.2,72,72,777

Net Corpus on hand

Rs.2,48,55,499

If you look at the above table, the final corpus in the post LTCG scenario is lower by over Rs.24 lakh. That surely looks like a big deal if you look at it in absolute terms. If you put things in perspective, the exemption of Rs.1 lakh is very small when we consider the massive capital gains that will result in equities over a period of time. Let us look at it differently. If your investment of Rs.30 lakhs grew to Rs.2.48 crore in 25 years instead of Rs.2.72 crore, what would be the difference it makes to your CAGR returns? You will be surprised but the CAGR difference over 25 years is less than 50 basis points; which is less than half a percent. That means, instead of 14% returns annualized, you will be earning around 13.52% returns on an annualized basis. In a nutshell, if you look at in terms of the IRR, the impact is really not too material. That is the good news for investors and for your financial plan in particular!