After a torrid week, Muthu (a retired finance professional), Sridevi (a financial advisor), KK (a full-time stock trader) and Ravishankar (a chartered accountant) got together for their weekly Saturday brunch at Murugan Idly Shop. After belting out their standard orders for onion uthappam and filter coffee, their conversation turns immediately to the Budget.
It is Muthu who flags it off: Well, must have been a busy week for you folks. I hear the Sensex’s 840 point fall this Friday was the biggest post-Budget crash after 2009. Can’t believe all this is due to the new Long-Term Capital Gains (LTCG) tax at 10 per cent on equity! Now, I’ve been holding some shares from 2010 and am sitting on five-fold gains. Why would I sell them suddenly just because I have to pay tax on those gains?
Sridevi : Oh, you’re an exception Muthu! I’ve been fielding quite a few calls from my clients since Thursday. They all want to know if they should sell their shares and equity funds before April 1 to avoid that LTCG. Some of them even want to switch to ULIPs, which are out of the LTCG net.
Ravishankar : Tough! But are you explaining the grandfathering benefit to them? They need not rush to sell, because all their gains up to January 31 have been protected by the FM. The highest traded price on January 31 for shares and the highest NAV for equity funds will now become their new cost of acquisition. They will pay tax only on the gains made over and above that. That too, if it’s over ₹1 lakh.
Sridevi : Oh, I’m trying to convince them to hang on. But you know what? This grandfathering clause is just too complicated to explain to anyone’s grandfather! Especially the part on capital losses. Think of this guy who bought a stock at ₹500 in July 2016 which fell to ₹300 on January 31 2018, but shoots up to ₹400 on April 2. He insists that he’ll have to pay tax on those ‘gains’ of ₹100 (₹400 minus ₹300) even though he’s actually made a loss.
Ravishankar : He’s got it all wrong. Ask him to read section 112A carefully. It says that the cost of acquisition of a share bought before February 1 will be the higher of the actual purchase price and the lower of two things — its market price on January 31 or the sale price. So that guy will make a capital loss of ₹100, not a gain!
Muthu chokes on his uthappam: Can you explain that slowly?
Ravishankar : To really simplify, if a share (or fund) you own traded below your buy price on January 31, you need not pay LTCG tax when you sell it. You may in fact have a loss to set off.
Muthu : Glad I don’t have to figure this out for the next ten years! It is pointless to sell. Tax or no tax, it’s taken me many years to find these 12 solid multi-baggers. If I sell them in a hurry, where will I find equally good replacements? Thanks to grandfathering, my gains so far are locked in.
Ravishankar : Yes, but do maintain records on the market price and quantity of all the stocks you own as on January 31, for the taxman. When you sell them many years later, you’ll need it to calculate the LTCG tax. In fact, I’m asking my clients to sell all their equity holdings before April 1 and buy them back immediately. That way, their gains get locked in, they needn’t pay LTCG tax and they don’t have to do this paperwork either!
KK : Hey, this must be another reason why the market’s tanking like this. I was wondering why any ‘long-term’ investor would exit in this bloodbath.
Sridevi : It’s a nightmare! I’ve got two dozen clients investing in equity fund SIPs. Now I’ve got to maintain records of ‘grandfathered’ gains on all their SIP instalments, for their capital gains statement.
Muthu : KK, you’ve been very quiet. Bad week, is it?
KK (grinning): Not at all. Great week. My technical signals told me long ago that the market’s heading for trouble. I was short on Friday and pocketed fat gains. Want a treat?
Muthu : You lucky fellow! Order us sweet pongal. How did you know?
KK : I watch the Nifty500 like a hawk, Muthu sir. It started falling behind the Nifty50 from January 8. Market breadth has been terrible since January and some mid-caps and small-caps have lost 25-30 per cent. Even Friday’s fall, I would argue, had global triggers. Look at the Dow. I think this LTCG tax is only an excuse for people who were already nervous to book profits.
Ravishankar : There was some confusion about Budget fineprint too. On Friday, there was this rumour that foreign portfolio investors had not been given grandfathering benefits. Whenever any FM messes with FPIs, the market loses it. Remember Participatory Notes? But that’s been clarified as a drafting problem, thankfully.
Sridevi : Lots of people are also complaining that LTCG on top of Securities Transaction Tax (STT) is a double-whammy. KK, so how does this whole LTCG bit affect you?
KK : No change, Sri. I usually hold my positions only for a few days at a time. I pay 15 per cent tax on short-term gains, plus STT. Will do the same now. My buys and sells are completely rule-based, I trade on technical indicators. I don’t overthink the tax part.
Ravishankar : So, in our group here, neither the long-term investor, Muthu, nor the short term one, KK, seem to be much worried about LTCG tax. And it is mutual funds who’ve been holding up this bull market. I hear retail investors have invested over ₹3 lakh crore in the last three years, ₹50,000 crore from SIPs alone. Funds will keep pouring money into the market. So, expect a bounce-back, friends!
Sridevi : Oh, don’t be too sure. Even among those SIP investors there are newbies who’ve never seen a bear market. Plus, there have been the usual cases of mis-selling. Balanced funds and arbitrage funds have gotten most of the equity flows this year. I personally know many investors, not my clients thank you, who parachuted from bank FDs to equity funds for ‘assured’ monthly dividends. They may very well be jolted by the market fall and the tax, and may go back to FDs.
KK : Yes, there’s been a lot of SMS and Twitter-based punting on shady stocks too. These dud stocks may continue taking the market down. But, thank you FMji, for these great trading opportunities.
Muthu : Actually, I don’t mind a correction either. A Nifty PE of 26 was a crazy valuation and that couldn’t have lasted forever.
Sridevi : I don’t really mind the tax on equity gains. But what makes me reach for my Amrutanjan is the paperwork. Why can’t the FM simply have said that all new equity investments made from so-and-so date will be taxed? Why this kolaveri?
Ravishankar : That, my dear, is to keep CAs like me and the well-staffed income tax department suitably occupied. If LTCG tax was as simple as paying 10 per cent to the Government, who’ll come to me? And how can the tax officer fulfil his annual KRA? Have some sympathy for others!
The foursome have a good laugh at this parting shot and gulp down their filter coffee.