Do LTCG tax on equities really make it unattractive?

After the budget announcement on February 1, equity investors are worried. They have to pay tax on long-term gains (LTCG) made from equities, which was earlier tax-free. That is a big negative for the investors. Some investors are contemplating many things but let's discuss the major ones:

“Why invest in equities anymore, since it has lost its preferential tax treatment?”

The answer is simple, equities as an asset class have created long-term wealth. It has made so many people rich because they remained invested in equities for the long-term. Look at S&P BSE Sensex, a well-known equity index, it has delivered approximately 16% CAGR returns since inception in 1979. That’s fantastic long-term returns. In India, actively managed funds have beaten the equity indices by a decent margin, which makes returns even sweeter.

“Why invest for long-term in equities, since the difference between STCG & LTCG is only 5%?”

Equities have created wealth in the long-run delivering approximately 16% CAGR returns; creating happy long-term investors. However, in the short-run equity markets fluctuate drastically, sometimes going in the negative territory too. Some short-term traders/ investors may make money, while most others lose. There are so many instances of investors not coming back to stock markets because they lost money, and most of them were short-term investors.

Simply put, the likelihood of making money in the long-run is definitely high compared to making money in the short run. Hence, do not complicate things by looking at the tax rate in this regard.

“Isn’t it better to look at other investment options, since their tax rate has remained unchanged?”

The tax rate on LTCG on equity shares and equity mutual funds is 10% now. If we look at other investment options, in most cases returns are taxable as per tax slab, which implies if you happen to be in 30% tax bracket, you will have to pay 30% tax. While in some investments LTCG is 20% with indexation benefit. Hence, equities are still receiving a preferential tax treatment (even if LTCG is taxed at 10%) compared to most other investment avenues.

LTCG tax on equities is playing on our minds mainly because of the anchoring effect, wherein we believed long-term gains from equities will remain tax-free for life. Hence, it is difficult to accept this change. The earlier we accept it, the better it is for us. Since investing in equities from a long-term perspective remains attractive even now.

The writer is founder and CEO, TBNG Capital Advisers