How to get the better of the LTCG tax and the DDT
Against the best of hopes, the tax on LTCG did come in Union Budget 2018. Of course, the LTCG will only apply at 10% on equity and equity funds above the Rs.1 lakh profit level. That is hardly a consolation because when you book your profits after 10 years you will lose 10% of your profits anyways and to that extent, your long-term goals are likely to be under-funded. So how should investors work around this?
Stick to growth plans
If you are invested in growth plans of mutual funds the answer is just to hold on. On the contrary, if you are into dividend plans then it makes sense to shift to growth plans as you can avoid the unnecessary 10% DDT that is going to be deductible from the next year. When you book profits in mutual funds you are going to forfeit 10% of your profits straight away. So if you have important milestones coming up in the next few years then you need to use the March 31st deadline to book profits and keep your commitment money separate. If your goals are still some time away then you can be rest assured that there is going to be a rigorous debate on this subject in the next few months. The government is targeting Rs.40,000 crore collections through LTCG tax but that may be a tad too ambitious. If the government does not see genuine revenue flow from LTCG tax then it will have little incentive to continue. For your financial plan, not to worry!
What about equities?
That is the slightly more complicated question. If you are sitting on long-term gains then what should you do? The easy answer will be to book profits on your long-term equity positions before March 31st so that your capital gains till date can be tax-free. You can always worry about future gains at a later date. Historically experience has been that reintroduction of LTCG tax is not only an administrative nightmare but also does not yield revenues worth the effort. That is because it firstly changes the attitude of people towards booking profits and they just prefer to leave their portfolio as they are. This will impact the market volumes and negatively affect the aggressive divestment plans of the government. For the government, it could turn out to be a Catch-22 situation on the LTCG tax front.
Wait in the sidelines
If you are suddenly finding the market hot and irresistible, then just hold your horses. If there is no change in the LTCG tax regime then we could see panic selling before March this year. You will obviously get better levels in the market. This is a market that vacillates between global uncertainty and taxation ambiguity. It is unlikely to rush up unless there is clarity. It is time for you to just wait in the sidelines and let the market discover its true levels. Watch out for what the FM has to say! ©