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From FY19, the stock selling in the long-term (beyond a year) would attract a capital gain tax of 10 per cent. The major worry for investors is that the difference between the short-term and long-term capital gains taxes is just five per cent. Given this, should they re-look at their equity investment strategy in the new financial year? G Chokkalingam explains in this BS Special piece
The domestic equity market is known for solid wealth creation in the long term, spanning over one to three years. In the past, those equity investors who picked up stocks successfully and also waited beyond a year got not only the opportunity for a significant wealth creation but also complete tax exemption on long-term capital gains. There was a significant incentive to hold the equities beyond a year as that would help avoid short-term capital gains tax at a 15 per cent rate.
From the new financial year, the selling in the long-term (beyond a year) would attract a capital gain tax of 10 per cent. The major worry for investors is that the difference between the short-term and long-term capital gains taxes is just five per cent. In the domestic equity market such small variation is meaningless for most investors due to a huge volatility in the movement of stocks and in the whole market as well. For instance, the market cap of all BSE-listed stocks crashed nearly Rs 14 trillion in a matter of just 50 days – it has fallen from the life-time record level of over Rs 156.50 trillion in the fourth week of January to Rs 142.73 trillion last Friday.
The Indian stock market has over 4,000 actively traded stocks and in any given week (and sometimes in a single day like last Friday), hundreds of stocks fall 5 per cent to 10 per cent. Hence, 5 per cent tax differential between the short term and long term for equity investments would make investors rethink their investment strategy, solely basing it on the tax front. It would be better for them to disregard the long-term investment strategy for the tax purpose and opt for more churning of stocks in the short term itself, unless the individual stocks they hold really give confidence for a significant wealth creation over a longer period of more than a year.
However, only a small sample of over 4,000 stocks becomes multi-bagger in the long term in normal market conditions. The period 2014-2017 was an exception – a solid majority for the present the government from the previous general elections, reform initiatives like the goods and services tax (GST) and positive cues from global economies and stock markets helped the overall BSE market cap rise as high as 78 per cent to hit an all-time record high of nearly Rs.157 trillion in January 2018 from the days of new government formation. In the process, hundreds of individual stocks became solid multi-baggers and zero-tax on LTCG really helped a large number of equity investors.
Such a phenomenal rise in the overall market cap or creation of a large number of multi-baggers is most unlikely, at least till May 2019. Uncertainties emanating from the forthcoming state elections and finally the general elections in 2019, monsoon forecast and its actual performance, impact of growing measures of global protectionism, etc, would lead to substantial volatility in the stock markets in the new financial year. Till the Lok Sabha election results are out, thanks to the Budget move on LTCG tax, investors would be better off in the new financial year formulating investment strategies for managing the volatility and stock-specific wealth creations, disregarding the 5 per cent lower LTCG tax on equities.
The author is founder & managing director, Equinomics Research