Financial Planning: Long Term Capital Gain (LTCG) Tax And Life After That

(This article is specific to financial regulations of India. However, the basics remain the same across different countries.)

There was a very irritating message on the social network regarding Income tax anomaly- it has been doing the rounds for last 3 years at least. Some people may not have liked my calling that post about Income Tax as Trash.

But the fact remains that in this age of free opinion, it is becoming difficult to see some good ideas or opinions and even less,  good creative writing.

Sometimes bare facts stare at us in the face and we fail to see or recognise them.

Almost since 5 years ago, I was talking about the impending Capital gains tax on equities, simply because the deal was too sweet. Even though I was benefiting enormously out of the LTCG exemption, I was quite aghast at the difference in the tax treatment between the Small Savings which were ACTUALLY being used for Nation building and Stocks +Mutual Funds.

For a moment if you pause and think, how exactly and whom exactly is the Stock Market benefiting?

I purposely put a Question Mark to the above.

Apart from broadly spreading the awareness about the country’s Stock Index so that the foreigners come and invest in it and also the country- what is the exact benefit to the country?

When a company’s stock price zooms up, who benefits?

The company!

It benefits in the sense that it becomes highlighted and recognized and more people start investing in it and the share price zooms even higher. Now the company does some trading in its own shares to earn that extra profit. It also uses its enhanced Market Capitalization (which has gone up due to the higher share price) to secure some loans at attractive interests to further expand.

Now in this entire process, investors like you and me and the Mutual Fund Managers (on our behalf) make money by buying and selling the shares of these companies.

That is all that a Stock Market serves a person in nation-building.

The backbone of the economy, on the other hand, is the – Debt market.

Whether you deposit money in FDs, Debt funds or Post Office schemes. All the money is diverted to the Debt stream for the Government and the Corporate world.

The Corporate uses it to enhance its operations and the Government uses it to do development in the country.

All the NPAs that you hear about are part of this DEBT world.

As you can also find out from the eternal and omnipotent internet; the size of the Debt market is any day much much bigger than Equity.

Now let’s consider the fact that how much of your savings are in the Debt. Include all your Bank accounts, FD, Debt Mutual funds, Post Office schemes; Gold Bonds & ETFs.

Further, consider that since 2014 you are actually paying Capital Gains on the Debt funds.

If you are following my style of investment, your majority of the funds are parked in Liquid Funds while you are doing STP into equity funds.

Which means for every transaction you are having a Capital Gain and that too SHORT TERM; and if you are an NRI then the Capital Gains is being deducted AT SOURCE i.e. TDS.

Now tell me how much noise did you or anyone in the country make while paying the Capital Gains or Tax (on FDs).

As regarding LTCG on Equity which has been levied on 1st Feb 2018 but will come into force from 1st April 2018– you will not incur this tax unless you sell.

Which means that since this is your COLLECTION phase of wealth- you don’t have to worry.

So who is making the noise about the ELTCG (or Equity Long Term Capital Gains)?

Naturally, it is the Big Ticket investors and PMS holders and operators and traders who are making a noise because they sell often. They are the ones who provide the volatility and uncertainty to the market.

But no-one noticed that up to 11 months and 364 days of holding, you were already paying 15% as STCG (Short-term Capital Gains tax).

So you see most of the times – news is misleading, it’s eyewash.

Not one person asked the basic question, which is applicable to over 520 investors who move with me.

Will the MF managers pay LTCG separately on their Sale Purchase of shares and we will again pay LTCG when we sell our MF units?

Isn’t that the more relevant question?

The idea of this article is that instead of reading other people’s forwarded views, please read things in original and think originally.

As my Guru, A N Shanbagh had told me often; never consider yourself less than any professional in any field. As a fresher starting with no pre-conceived notions will probably lead you to better discoveries than a professional whose livelihood depends on it.

Fair enough, with my own thinking and conviction I have charted my Nirvana and helping few others to achieve theirs.

Always be future Proof: By thinking originally in your own mind’s eye, always weigh the possibilities objectively; and howsoever they may seem improbable or impossible don’t discount them; but prepare for them well in advance.

I had taken LTCG into my account of things almost 5 years back- and had told you in every seminar- that as of now you are having this advantage; when the rule changes- we will see.

Well now the rules have changed- so we take that into account – and move forward.

Instead of posting on social media and creating unnecessary debate I have sent the following suggestion to PMO.

In addition to the LTCG of 10% after 1 year; please consider modifying the law as follows: LTCG is reduced to 0.7% after 2 years of holding, it is further reduced to 0.3% after 3 years of holding and ZERO after 4 years of holding.

This step if accepted by the FM will provide stability to the market and give the advantage to the true investor and weed out short-term opportunity seekers.

In a similar way, I look forward to some creative ideas from you.

On a parting note, I wish to leave you with an unsettling feeling. Please prepare for the Government doing away with the Tax exemption for NRIs within next 5 years.

Now don’t tell me that it will never be done. You already know my viewpoints about governments of the world.

Note: It is difficult to track things in a single country like India which is so huge and complex. To say that I can advise you for all the countries, whose readers are reading these articles- would be a big lie. I am not acting as your financial advisor. Due to my exposure to different geographical conditions, I have found these products which can be used by us –the hapless Seafarers. The names and methodology of these products may differ from country to country.

Hence my earnest request to you is to please use the power of the internet and find out these products in your country. They are common products and mostly available all over the world. If you find they are named differently in your country, please inform me in the comments that you are so kindly making. It will help us to spread awareness and enhance your own knowledge about your future planning.

Disclaimer: The authors’ views expressed in this article do not necessarily reflect the views of Marine Insight. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Marine Insight do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader.

The article or images cannot be reproduced, copied, shared or used in any form without the permission of the author and Marine Insight. 

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View Comments (1)

  • Sir very well written , in a process clearing lot of air. I read your suggestion which you have written to PMO, to add more into it, indexation should also be applied to ELTCG similar to Debt funds which will also help us in long run, what are views on this ?