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How the LTCG will make a change to your Financial Plan

When the Union Budget 2018 was presented by the Finance Minister, the big question was what would be the impact of the Capital Gains tax. The budget had announced a flat 10% tax on long term capital gains on equity investments and on equity mutual fund investments. This was a major shift because till March 2018, LTCG on equities and equity funds were entirely tax-free in the hands of the investor. This LTCG becomes specifically relevant because most investors do rely on equity funds to create wealth in the long term and to meet their long term goals like retirement, child education plan etc. Know where you stand financially by using the gratuity calculator and plan further investments according to your financial goals and needs.

What is LTCG tax and what will be the impact of LTCG tax on  your portfolio. More importantly, what will be the impact of LTCG tax on financial plan. Let us first understand how the LTCG tax will be imposed on the investor.

How will the LTCG tax be imposed?

When it comes to equities and equity funds, the definition of long term capital gains is a holding period of more than 1 year. Remember, in this tax the benefit of indexation will not be available even if you hold shares for longer periods of time. For example, even if you sell shares after 15 years holding, the tax will be imposed at a flat rate of 10% on the capital gains. The only benefit that you will get is a basic exemption of Rs.1 lakh and any capital gains above the level of Rs.1 lakh will be taxable at 10%. When it comes to your financial plan and the goals that you have tagged to your equity mutual fund SIP, this LTCG tax will impact you in two ways; it impacts your corpus and also your regular contribution.


How LTCG tax will impact your investment corpus

There is really no rocket science to it. You will end up paying 10% tax on LTCG when you redeem your equity fund corpus. We are not sure whether the LTCG tax will still be in existence at that point of time, but let us assume that it still exists. Your final corpus will be reduced to that extent. Let us understand the impact with a comparison..


Pre LTCG TaxAmountPost LTCG TaxAmountRetirement SIP monthlyRs.10,000Retirement SIP monthlyRs.10,000Tenure of SIP25 yearsTenure of SIP25 yearsInvested inEquity FundsInvested inEquity FundsCAGR returns14%CAGR returns14%Amount ContributedRs.30,00,000Amount ContributedRs.30,00,000Final  CorpusRs.2,72,72,777Final  CorpusRs.2,72,72,777Long Term Capital GainRs.2,42,72,777Long Term Capital GainRs.2,42,72,777Basic ExemptionNot ApplicableBasic ExemptionRs.1,00,000Taxable LTCGNot ApplicableTaxable LTCGRs.2,41,72,777Tax on LTCGNilTax on LTCG at 10%Rs.24,17,278Net Corpus on handRs.2,72,72,777Net Corpus on handRs.2,48,55,499


As can be seen from the above table, the final corpus in the post LTCG scenario is lower by over Rs.24 lakh. If you put things in perspective, the exemption of Rs.1 lakh is very small when we consider the massive capital gains that will result in equities over a period of time. This gets more pronounced in this case as there is no indexation benefit available to the investor. Effectively, if the investor had a corpus of Rs.2.72 crore in mind, then it is essential to reduce that figure down to Rs.2.48 crore. Your regular income will be received on this lower corpus after retirement and hence you need to adapt accordingly.


How much difference will this reduced corpus make in terms of regular income. Assuming that you were to deposit this corpus in a liquid fund earning 6% per annum, your monthly inflow post retirement will reduce from Rs.1,36,364 to Rs.1,24,2777.


How can I tweak my contribution to maintain the same corpus?
If you are not comfortable with a reduce corpus for retirement, then the other option is to increase your corpus contribution accordingly. If you have just started your SIP in the last 3-5 years then the thumb rule is to increase your monthly contribution to the SIP by 10%. That means; you can increase your monthly SIP from Rs.10,000 per month to Rs.11,000 per month to ensure that your final corpus is not impacted. Of course, the affordability factor does come in at this juncture but that is the best way to hedge your bets in a scenario where the LTCG tax will take away a good chunk of your long term wealth.


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