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| Capitalstars Investment Advisor |
Will the finance minister Nirmala Sitharaman cut LTCG or long-term capital gains tax on equity mutual funds? Everyone – be it mutual fund managers, advisors, or investors – is eagerly waiting for the budget tomorrow. ETMutualFunds.com has a different take on this. No, we are not using the opportunity to speculate about a possible tax cut, but why you should be careful about this aspect in your calculations about your future goals.
Let us first address the possibility of a rollback of LTCG tax or long-term capital gains tax on equity mutual funds re-introduced by the then finance minister Arun Jaitley in his last budget two years ago. After the reintroduction of LTCG tax, investments held in equity schemes over a year were taxed at 10 percent. However, the tax would be applicable to capital gains of over Rs 1 lakh in a financial year. The new tax also came with a `grandfathering’ clause, which exempted gains made before January 31, 2018.
Now, why did the government re-introduce the LTCG tax of 10% when most market pundits believed that continuing zero tax regime is a must for India where the average investors hardly participate in the stock market? Well, apart from its love for social spending and taxing the rich, the government clearly wanted to signal that it favors an EET or Exempt, Exempt, Tax (tax-exempt at the time of investing and earning returns but taxed at the time of withdrawal) regime when it comes to long-term investment options. This method is followed by many countries. This is one of the reasons why the government kept NPS, its ambitious pension product, under EET.
Even now, most experts are speaking about scrapping LTCG tax to boost the sentiment and re-introduce it at an appropriate stage again. They say once a sizeable percentage of the population starts using equity to fund their long-term goals and start understanding the importance of equity investments, the government can change the taxation of these schemes.
This is a crucial point that shouldn’t be overlooked by long-term savers and investors.
The point we want to highlight is that even if the government cuts LTCG tax on equity in budget tomorrow (that is a big if), the LTCG tax could come back in the future. And it is extremely important for your future financial plans. If LTCG is back and it is taxed at 10% or 30%, there would be a shortfall in your corpus. You can take care of it only while you are earning, not after your retirement. Remember the cliché – you get a loan for all your needs, except for retirement?
That is why we always maintain that you should include inflation and taxes in your calculations to determine your target corpus. Without these two crucial inputs, you would have some unpleasant surprises on the eve of your long-term goals.
To summarise, irrespective of a rate cut or not, you should continue with equity mutual funds to take care of your long-term financial goals. This is because equity offers superior returns (inflation-beating and better after-tax returns) than other asset classes over a long period. This is essential to build a large corpus to achieve your long-term goals.
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