While still upset, we have adjusted. While we would love to go back to the pre-2018 days of 0% tax or at least remain in the 2018-24 era of 10% tax, there is not much we can do. We equity investors (both in mutual funds and stocks) must now shell out more tax on our long-term gains. But will this remain at 12.5%? We don’t know, to be honest.
But if we look at the trajectory, over the last 6+ years, the LTCG (long-term capital gains) tax on equity has increased from 0% to 10% to 12.5%. So, it won’t be a surprise if it again sees an up move after a few years to bring it closer to middle-tax slabs. This is just speculation or a wild guess. But no doubt, as of now, the trajectory is upward-sloping.
So, if the future holds more taxes(!) for us, what should we equity investors do?
We rely on equity’s potential to generate inflation-beating post-tax returns. But with higher taxes to be paid on gains from equity going forward, what will be its impact and what can we do?
Many small investors (me included) have been diligently doing monthly SIPs for their financial goals like retirement (or early retirement), children’s education, marriage, vacation, future house purchases, etc. Naturally, with the tax hike, there is now a mathematical need to save a little more to account for higher tax outgo at the time of redemption in the future to fund the goals. This will be more obvious to those investors who invest in a goal-based manner as per the financial planning calculations.
Ideally, you shouldn’t just adjust the plan for the recent 2.5% extra tax hike. If you think that in the future, too, there will be similar tax hikes, then it would be wise to build buffers in your calculations accordingly.
You can’t just ignore or wish away taxes to be paid, thinking that you will ‘manage it somehow by being smart about withdrawals’. You can, of course, do it to an extent. But you cannot avoid it altogether, and hence, need to build buffers.
Recalibrate the numbers
So, if your financial goal planning were based on a lower tax assumption, then you need to recalibrate the numbers now for the additional tax burden. You can either aim for a higher rate of return from investments and/or increase goal timelines slightly and/or invest a little more. The last option is the most practical one for obvious reasons. Why? Because going for higher returns means taking higher risks, which may not work in your favour at all times. Extending goal timelines may not be possible for many goals; for example, you can’t ask your 10-year-old daughter to start graduation at age 20 instead of 17-18 due to tax hikes! Isn’t it?
Hence, you need to start saving and investing a little more. Your investment advisor can help you do the numbers about how much exactly.
Also, we need to be slightly more careful about churning the portfolio, whether to rebalance or to exit/enter something. Each such move will cost us a little more now. If looked at from another angle, this would make people more disciplined and help avoid unnecessary exits/churn/rebalance.
The tax increase slightly does hurt (after all we are profit-seeking humans). But does it require any change in direction or approach?
The answer is: No.
Whether it is 12.5% or 10% earlier, as an asset class, equity remains retail investors’ best bet, in the long run, to generate inflation-beating returns, even after all the taxes. Higher taxes on equity gains will reduce your post-tax returns slightly, no doubt. But unless you are an ultra-conservative saver who only keeps money in fixed deposits (in spite of slab-level taxation that is much higher than 12.5% tax), equity still remains the best asset class for the long term and in my humble view, should form a major part of any sensible (and at least moderately aggressive) investor’s core long-term portfolio.
Also Read: 20% levy on short-term capital gains has given young F&O traders a tax incentive
So, if you are following an equity-oriented, goal-based financial plan, please stick to it. Just try to invest a little more going forward. That’s it. Nothing complex.
Dev Ashish is a registered investment advisor and founder of Stable Investor.
Disclaimer: The views expressed above should not be considered professional investment advice or advertisement or otherwise. No specific product/service recommendations have been made, and the article is for general educational purposes only. The readers are requested to take into consideration all the risk factors, including their financial condition, suitability to risk-return profile and the like and take professional investment advice before investing.
