Equity LTCG Taxation: How much tax do I need to pay? Illustration part 1

Published: February 2, 2018 at 2:25 pm

Last Updated on

It was announced in Budget 2018-2019: Long Term Capital Gains from Equity to be taxed at 10%.  Here is an illustration of how much long-term capital gains tax you need to pay on a long-term systematic investment in equity or equity mutual funds. This is part one where the LTCG tax after each year of investment is shown. In part two I shall consider the benefit (if any) of booking one lakh profits each year to get a better base price when be finally redeem.

For this study,

1: took the annual closing values of BSE Sensex as a model equity instrument.

2: The starting date will be set as Dec 2010.

3: An annual SIP of Rs. 25,000 will be considered

4: When the time for the second instalment arrives, the units purchased in the 1st instalment will be eligible for LTCG and so on.

5: The value on Jan 31st 2018 is taken as 483.31 (this is arbitrary and is of no significance)

6:  The gains as on Jan 31st 2018 will be called grandfathered capital gains (GCG).

7: IF GCG is negative then it is taken as zero. See Long Term Capital Gains Taxation from Equity: Examples (Budget 2018-2019)

8: Net CG = Actual CG – GCG. If GCG > Actual CG then Net CG = 0

9: Taxable CG = Net CG – one Lakh. A tax of 10.4% from this is deducted.

10: All the above values are shown for each year.

11: The CAGR (calculated using standard SIP formula) before and after tax is also calculated.

Equity Long Term Capital Gains Taxation on systematic investment table

Please open the image in a new tab and study it. The yellow line represents the date from which the new LTCG tax rule kicks in.

Equity long term capital gains taxation table with correct capital gains

Portfolio value before and after tax

Pre-tax and post-tax annualized return after each year of investment

Reduction in returns due to Long-term capital gains tax on Equity

Reduction in returns due to Long-term capital gains tax on Equity

If you want to break your head over this small “loss” go ahead. I am not bothered about this.

The effective tax rate = tax paid by actual CG

Notice that the impact of the grandfathered CG and the one lakh tax-free limit 10-odd years and gradually vanishes.

In part II we will consider the impact (on Excel at least) of booking LTCG each year as many have asked. Do not jump to conclusions. Let us approach with an open mind. In any case, I will not waste my time calculating how many units I should redeem so that net LTCG will be 1L or less. You can see how non-trivial the calculation is for annual investing. Imagine the situation for monthly investing.

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