The government has proposed to impose long term capital gains tax of 10% on equity funds in The Union Budget 2018-19. However, this tax is applicable only if the capital gains exceed Rs.1 lakh. Equity as an asset class delivers superior returns over all other asset classes in the long run. This was true when there was no tax and continues to be true when there is a 10% tax.
We (99% of Ventura Suceder Clients) are strictly following our PFP sheet whenever we are planning to start or increase our investments. We have fixed our goals as per the inflation, PV (PRESENT VALUE) and assumed a return of 12% to reach the FV (FUTURE VALUE).
- Impact on Long Term Goals : LTCG is 10% on profit .... If 12% is our expectation to reach our goal which is 20 yrs ahead,then the fund should give 13.3 % returns , so that post LTCG ( 10% of 13.3 is 1.3) net return is 12%. We would be on right track for all our goals inspite of paying LTCG if our net return is more than expected return.We can track this in our Goal Wise sheet in our Portal.
- Morever this rule applies till 2019 March i. e, 14 months more.But our goal is 20 years ahead. We will comfortably reach our goals inspite of this rule getting continued.
Now that you are aware of the changes, what you need to do? Nothing. Just continue to stay the course, as always.
Start with a 1 Lakh investment for 20 Yrs @ 12%.
1) Sell the investment at the end of the year, pay the tax and reinvest the proceeds.Do the same thing every year for twenty years.
End up with 7.78 lakh clear profit.
2) Don’t sell anything. At the end of twenty years, end up with 8.78 lakh after-tax profit.
See the difference in long term wealth creation when there is no churning.We advised no churning even when there was no tax on long term capital gains. It now becomes all the more important to keep the churn very minimum.
What investors should do?
There is no real reason to panic at all at an individual level. Investors shouldn’t bother about falling markets and keep on investing in equity-oriented mutual funds based on their personalised Goal wise plan. Introducing 10% capital gain tax on long term gains is more of a sentimental blow and the fundamentals of the Indian markets wouldn't change because of this.
- As far as MF goes most of us are doing it for some long term goal and we can just continue to do so. Yes, you will pay some taxes on future gains but not on your past ones. Investors doing SIP should simply continue, you may now want to bump up the amount by 10 % to take care of the taxes when you redeem. Note that this is mainly true for the Growth option.
- Continue with SIP in your MF investments, look into increasing the monthly outlay to take care of the eventual taxes.
Read this carefully in case you are not sure when should you redeem your mutual fund:
· When you have met your financial goal
· When you need to rebalance your portfolio
· When your mutual fund scheme underperforms consistently
· When there is a change in the fundamental attributes or investment objective of the scheme
· When you find a better alternative
This is not a generalised article on LTCG. It applies only to Ventura Suceder Clients as we are doing Goal wise plan. 99% of Ventura Suceder clients are following this process.I request the remaining 1% clients also to follow the Goal Wise plan to achieve our Goals comfortably.