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Long Term Capital Gains Tax & Profit Booking

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4.2.2018

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." – Warren Buffett
Market is abuzz with noise on long term capital gains tax and its impact on your investments. All those people who were ranting against exempting agriculture income till now, have turned their rhetoric against levy of this LTCG tax on equity. While we believe government is accumulating feedback and may bring in some respite in form of allowing indexation benefit on these, this tax is going to stay and we must align our investment strategy to this reality.

First thing we must understand that this tax will be applicable only on the capital appreciation over the values as on 31st January 2018. Also in case your cost of acquisition of a share or mutual fund is higher than the value as on 31st January then higher cost will be considered as your cost of acquisition. So you don’t have to worry about any gain you have made till now on your equity investments including equity mutual funds.

The Friday Bash: Fall of over 2.5% in Nifty and Sensex on Friday is being attributed to introduction of LTCG tax. But a little scrutiny will tell you that it was not only Indian markets even Dow Jones Industrial Average, an index for American stock markets also fell by almost the same margins on the same day. Further scrutiny will tell you foreign investors invested almost twice the amount that Indian investors sold on Friday. Clearly the foreign investors are still finding a lot of juice in Indian stock markets despite this LTCG tax and encashed the opportunity to enter the market.

What looks like to happen: We at InvestmentMitra feel Friday’s fall should not continue for long and should not culminate into the kind of correction that everyone is talking about and even we were also waiting for sometime. For the big investors including corporate who are likely to make handsome money from stock markets over their portfolio values of 31st January between February and March 2018, will be booking their long term profits before the end of the current financial year to save on the taxes that will be leviable from 1st April onwards. Around that time we might see more price correction taking place, higher in magnitude than the current one.

Strategy going further: We advise our investors to wait patiently and not to panic till mid of the March. In case your portfolio has gained substantially from 31st January’s values and is long term then you can book profits, otherwise there is no need to even look at the valuations as this will be a temporary phenomenon. Also preserve your cash and use it to benefit from the sale that market may offer. Do look for an opportunity to book long term capital loss in April to offset your future long term capital gains.

Sit down with your investment advisor at the earliest to identify the opportunities in your portfolio and pen down the action points to be taken in next 2-3 months.

For any further query or discussions or for an alternate opinion you may contact us at InvestmentMitra by replying to this message or may email to info@investmentmitra.com.

Happy investing!

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