Investment Trivia

LTCG tax and its impact on your investments

LTCG tax and its impact on your investments

  • A long-term capital gains tax of 10% is applicable to equity investments for returns exceeding Rs. 1 lakh.
  • This is applicable only from March 31, 2018. Additionally, gains accrued till January 31st, 2018 will be grandfathered, which basically means that gains made up until that point will be exempt from LTCG.
Investment (Equity) cost one year ago 100000
Value of investment on 31st January, 2018 110000
Investment sold on 1st April, 2018 125000
Total gains 25000
Gains for the purpose of calculating LTCG tax 15000
Tax at the rate of 10% 1500

Above table is for illustration purpose only

Illustration of the impact of LTCG on an equity investment of Rs.200000 which grows at a 15% CAGR

Value of equity investment
on redemption (INR)
Tax @
Post Tax
Returns (CAGR)
1 year 230000 30000 Nil 15.00%
5 years 402271 202271 10227 14.41%
7 years 532004 332004 23200 14.27%
10 years 809112 609112 50911 14.26%
15 years 1627412 1427412 132741 14.35%
20 years 3273307 3073307 297331 14.45%
25 years 6583791 6383791 628379 14.54%

The difference between 5 years and 1 year returns is: 0.59%
The difference between 25 years and 1 year returns is: 0.46%

As we can see from the above illustration, in most cases, the impact of Long-term capital gains (LTCG) tax on equity returns is marginal. As the holding period increases from 10 years to longer duration, the impact becomes minimal.

Dividends in equity mutual funds now attract a Dividend Distribution Tax of 10%, which is relatively lower than the 25% tax that dividends from debt funds attract.

To harness the true value of equities, one must stay invested for the long-term and let the investment grow. Withdrawing cash in the form of dividends might not necessarily serve that purpose. Hence, for investors in equity mutual funds who are looking to capitalise on the long term value of equity investments, the introduction of these taxes will have little or no impact. Please consult you tax advisors for more details and before making investment.