I would like to update on the yesterday’s important announcement in the budget with regard to personal finance.

Long Term Capital Gain Tax (LTCG) is Back: After 2005, again in the yesterday’s budget govt reintroduced the LTCG Tax. Since almost 13 years there was no long term capital gain tax.

Going forward there will be a LTCG tax of 10% on shares and equity oriented funds.

There was no changes made to debt. It is same as earlier.

How it Works:

To calculate LTCG the share value or NAV of mutual fund as on 31st January 2018 would be taken into consideration.

Assume you invested in a share or mutual fund last 5 years back at Rs 100. Now the price of the same is 300. And you want to redeem it in the next two years. I.e, in 2020, when the price is at 400. For calculating LTCG your cost of purchase is taken as 300 instead of 100.

So your LTCG liablility is Rs 10 ( 400-300=100*10/10. 

Investments done till 31st Jan 2018 does not attract any tax.

Any investment in shares and equity funds from Feb1st 2018 is subject to long term capital gain tax of 10.04%(including cess of 4%)

There will be some negative reaction from the market in the short term. In the long run equity market will follow earnings growth. Equity as an asset class has potential to deliver superior returns over other asset classes in the long run.

Any decent amount of correction can be taken as an opportunity to invest with a long term view, adhering to one’s asset allocation.

Strategy to be applied:

Don’’t buy and sell your stocks and funds frequently. You have practically experience that we hold the same funds since the beginning of your investments with me. Whatever the minor changes has been done is to rebalance the portfolio in some cases.

Invest in mutual funds than buying and selling stocks directly. The trading of buying and selling shares is done in the funds portfolio, without any impact of short and long term gains. And invest in asset allocation funds, which does automatic rebalancing between debt and equity. Majority of you had been such funds in your portfolio.

Even the PMS investors will suffer, because they generally do lot of churning of the portfolio. Keep a watch those you had investments in it.

Since 1 lakh of capital gain is tax free. In case of need or to rebalance the portfolio one can do it without incurring any tax liability till 1 lakh per annum.

For those of you are opted for dividend option, till now there was no dividend distribution tax on equity funds. However to be at par with growth option, even dividend income is subject to 10% tax. But till now there is no info from when it will be applicable. I will keep you updated and do take necessary action as and when needed.

For long term investors it will not have any impact. One need to just stay the course irrespective of short term negative market movements caused by budget, elections and global events etc. It is inherent nature of the markets to fall 10-15% in a year or so and its makes market healthy.

G sec Yields have moved up significantly in the last couple of months. They are looking very attractive for investment with a 3-5 year view for superior returns than bank FD’s. Don’t ignore it. In the past i had mentioned the same with respect to tax free bonds and other regular debt products. Because of rise in yields there are mark to market losses for the recently done investments in debt. But they will get offset over a period of time.

         Do let me know in case of any further information.

“Investing is the only thing which you become better at as you grow old.”-Charlie Munger