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

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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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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.

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21 Comments

  1. This is all good if it is assumed that government remains happy with 10% LTCG year after year. As seen what has happened to service tax which started with 5 % and ended up where it is today, it can be safely assumed LTCG will look like a cash cow in future to the govts.

    1. This is the case of all rules. You project based on present information and change after the facts change and not waste time worrying about it in between

  2. Sir, my doubt when we are investing in MF they are buying and selling the equity from market and they will pay LTCG 10% when they sell. As an equity MF investor, why we should pay 10% LTCG on units?

  3. If you want to break your head over this small “loss” go ahead. I am not bothered about this – u really did bother about others breaking their head and put this post together..thanks for that – appreciate it.

  4. is this because the income generated by MF are exempted from income tax under section 10 (23d). Does this still applicable after finance bill 2018?

  5. Sir,

    Most of people do monthly sip and your example sheet is a different one.
    I am not able to break it into month nav and do the maths.
    Could you please, make a sample sheet , like you make for calculate xirr recently??
    It would be a great help.
    Thanks

  6. This was a case of never redeeming but what about of investing in a mutual fund and switching the scheme after a while when fund doesn’t performs well.Would there be lesser money to be compound hence lesser return ?

  7. Thanks for the efforts. Assuming a long time horizon (10 years) and if we redeem investment to save 1 Lakh capital gains & re-invest immediately, it essentially boils down to saving 10% of 1 Lakh (or 10,000/-) per year which we can save. This is equivalent to 10,000 per year SIP (< 1000 per month) invested back (which again will incur capital gains at redemption). So the only advantage of this frequent redemption is when you actually want to utilize this money for spending every year. The hassle does not seem worth. It might be worth looking if the time horizon is much shorter. Just my thought.

  8. i think the example must include the impact of basic exemption limit (currently at 2.5 lakh).Suppose i sold 5 lakh worth of equity mf which i had purchased for 5 years ago at 2 lakh and that is my only source of income.In this case the gain of 3 lakh is total income for the year,hence after deducting 2.5 lakh basic exemption it comes to 50000 .the tax would come to around 5000 and not 30000.Am i right?

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