Why the 10% LTCG tax isn’t that big a blow
The longer the holding period, on a CAGR basis, the impact of long term capital gains tax on your equity returns comes down, due to the compounding effect
SINCE THE UNION Budget was presented on February 1,2018, there have been lots of reactions initially, and then discussions on how to optimise the impact of long-term capital gains tax (LTCG) like SWP / booking profits up to LTCG of Rs.1 lakh per financial year. Now let us look at the worst case: you have crossed the threshold of Rs.1 lakh and now you have to pay LTCG Tax. What is the impact on returns?
We will discuss that now, but it is nothing to deter you from investing in equities.
The proper way to look at returns is compounded annualised growth rate (CAGR). The longer the time period, on a CAGR basis, the impact of tax on your returns comes down, due to the compounding effect. Let us look at a few examples.
Given the holding period and tax rate, 10.4% over one year is not that unfair. And who knows, sometime in future the government may increase the tax rate on equities, increase the holding period and given the benefit of indexation
Source- FINANCIAL EXPRESS. GOOGLE.