Your stock market investment strategy in LTCG era

LTCG, the abbreviation for long-term capital gain on sale of equity stocks is back. Short-term capital gain already exists. It simply means that as an investor to stock market you need to pay tax once you get in. This is irrespective of the duration of your holdings. However, the tax rate differs in case of long-term and short-term. The same assessment rules will apply to long and short-term gains on real estate investment trust (ReIT) and infrastructure investment trust (InvIT). Equity shares and units of these trusts along with equity-based mutual funds do not qualify for any indexation benefits.

Long and short-term capital gains tax is over and above STT (security transaction charge), exchange transaction charges, SEBI charges, stamp charges and GST of 18% on brokerage and transaction charges. The concept of fair market value replaces the indexation benefit. Also, the LTCG calculation on bonus and right shares will use the same fair market value concept. The fair market value (FMV) as on 31 January 2018 is considered in each case.  And the cost of acquisition of such shares and any gains thereof until 31 January 2018 is exempted from tax. Let us deep drive into the provisions of LTCG before we analyze the impact on stock market investments.

The date of commencement of the new LTCG regime is 01 April 2018. However, there is little trick imposed by our honourable finance minister in its calculation.

The four scenarios on tax implications on sale of shares held for 12 months and above

The following four scenarios explain the tax implications in case you sell your long-term holdings in the LTCG era. The scenarios are self-explanatory.

Scenario 1 – You purchase and sale the long-term holding in shares before 31 January 2018 and the holding period was more than 12 months. This is exempted under section 10(38). Section 10(38) will cease to exist from 01 April 2018.

Scenario 2 – You purchased the long-term shares before 31 January 2018 and sell it after 31 January 2018 but before 01 April 2018 and the holding period is more than 12 months. In this case, also your profit is exempted from LTCG under section 10(38).

Scenario 3 – The purchase is done before 31 January 2018 and sale after 01 April 2018 and the holding period are more than 12 months. The profit made in this case is taxable under LTCG.

Scenario 4 – You made the purchase after 31 January 2018 and sell after holding it for 12 months. Any gain made out from this sale is also covered by long-term capital gain.

Some concerns that will aid you to secure choices on your long-term investment plans in shares are considered in subsequent paragraphs.

No indexation benefit on shares sale under the LTCG taxation

Before analyzing the actual impact of indexation on long-term investment, let us understand the very concept. You apply indexation to calculate gains from holding any asset for long-term. Through the value of asset indexation, the cost of acquisition is adjusted against any rise of inflation in the value of that asset. This is the reason for the central government to notify the cost inflation index. You need to include certain particular factors in order to calculate the indexed cost of acquisition of assets. These include the year of acquisition or improvement. Then there is also the year of transfer. Thus, you need to estimate inflation index for the year of acquisition and year of transfer for arriving at indexation benefit. Basically, under indexation, the cost of acquisition is adjusted against the inflationary rise in the value of an asset.

This indexation is further used in calculating any gain during the sale of an asset held for long term. However, long-term capital gains arising from the sale of equity shares listed on a recognized stock exchange was exempt under section 10(38) of income tax act. From February 2018 onwards the BJP led government at the centre erased this section. Now long-term capital gain is applicable on sale of shares also. When you hold shares for more than 12 months then it is a long-term holding.  In a similar way holding till 12 months is short term.

Also, the government also deprived indexation benefits on the sale of equity shares. By providing the indexation privilege, the tax assesses used to capture the advantage of a moderate tax burden. Denying the assessee of this advantage means that their tax burden will increase more.

Section 112(A) to replace section 10(38) of the income tax act

With the removal of section 10(38), the government now introduces section 112(A). With this amendment, any sale of equity shares, units of equity oriented mutual funds or units of business trusts is to be taxed. Any gain on holding for less than 12 months on these assets was already taxed under short-term capital gain. In line with it, any holding beyond 12 months is now attracting long-term capital gain under section 112(A).

The only difference is the applicable tax rate. Short-term capital gains are taxed at the rate of 15% while long-term gains will now be taxed at 10%. Also, there is one exclusion to this.  Any gain in excess of INR one lac will only invite tax and that too on the excess value. You will need to pay LTCG from the financial year 2018-19 i.e. the accounting year 2019-20. This contrarily suggests, any sale of shares subsequent 1 April 2018, will result in LTCG. Of course on those shares that you own for more than 12 months.

With LTCG comes in the provision of long-term capital loss

Yes, booking LTCL is now a reality. Till now, no benefits were there in case an investor remains invested in any stock for long-term and circumstance make him book loss on those holdings. The good news is that he can now take the benefits of such booked loss on any long-term holding investments. Not only this he can set-off against any other LTCGs in subsequent 8 years. Further, any unabsorbed LTCL can additionally be carried ahead to succeeding eight years for set-off against LTCG. Earlier to this enactment, only short-term capital losses were allowed to set off against both of the short-term gains and long-term gains for subsequent 8 years.

Capital gains on long-term holding of shares still have competitive advantage over short-term holdings

In order to check cases of capital gain tax avoidance on both long and short-term shares holding government introduced securities transaction tax (STT)from the financial year 2004-05. However, the BJP government bring back the long-term capital gain of 10% from the financial year 2018-19. Further, if you hold any shares for less than 12 months you are already paying 15% under short-term capital gains. Both STCG and LTCG is over and above the already existing STT on both buy and sell of such shares. This still makes short-term investments in shares costly than holding them for long-term.

What investment strategy is there for long-term investor of listed stocks

After discovering the intricacies of the LTCG, let us now move to our critical problem. The problem which is in the mind of every investor, irrespective of long-term or short-term holdings in listed shares. Therefore, lets us understand different choices open to a long-term investor to adequately manage this new tax structure on gains stemming from a long-term holding of Indian shares.

You must re-plan your saving strategies

All of us save and subsequently invests our savings to achieve some of our long-term goals. Long-term goals may be child education or retirement planning or marriage or even to fulfil some of our desires like buying a car or some luxurious item. All this entails us to formulate a financial strategy and determine the anticipated long-term profits. Now, since the required long-term gains are decreased by 10%, you may expand the number of investments to reach out the intent outlay on time. As a suggestion, you can simply increase your SIP to listed equity purchase by roughly 10% to invalidate the influence of 10% LTCG tax.

You must pick the appropriate type of stocks investment

The demand for 10%, LTCG tax does not suggest you should bypass investing in equities. Even with this demand, the taxing is least, in fact half, when compared to other asset classes of long-term investments like gold or real estate. So, I firmly submit that you must prefer long-term investments in listed equity for accomplishing your long-term goals. Nevertheless, you must pick the right type of equity. For instance, you can have a fusion of stocks in your long-term portfolio like regular dividend yielding stocks, remarkable growth-oriented stocks or even mature companies stocks or some cyclic stocks as well.

Make a habit juggling your long-term investments

Considering, INR 1 lac of long-term earnings are tax-free each year, at the completion of every year, you can sell an equivalent amount of shares. After that, you may instantly repurchase them. And this will help you completely save INR 10000 every year from your long-term tax outage. Hence, on a cyclic basis, you can take advantage of the granted privilege. You can also plan for systematic withdrawal plan (SWP) from your long-term investment in stocks.

To sum, long-term investments in stock markets are yet the valid means to accomplish your long-term purposes. Still, you require to be extra careful and has to exercise some cyclic steps to obtain the soundest of the given situation. Also, you can raise the monthly finances towards your long-term aims to accomplish them.

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