LTCG to be taxed at 10%: What choice do investors have now?

The move to impose tax on long-term capital gains (LTCG) has sent shock waves across the stock market, pulling equity markets deep into the red. According to the Budget 2018 announcement, investors will have to pay 10 percent tax on LTCG from stock markets exceeding Rs 1 lakh.
 
Though many analysts believe that the 10 percent tax on the LTCG may pose hurdles in raising assets for the mutual fund equity schemes, some experts have said that tax on LTCG will only have a sentimental impact.
 
Additionally, if investors can adjust to this new tax regime, equity investments can yield good returns over the long-term.
 
How will tax on LTCG impact investors?
 
Talking to Zee News Digital, Bhairav Dalal, Partner - Financial Services Tax, PwC, said that long term investors will need to factor in a 10 percent tax on their returns.
 
“This will certainly increase the expected returns for such investments. All categories of existing investors are protected for all unrealised gains made until January 31. Resultantly, only incremental gains will be taxed post March 2018,” Dalal said.
 
“We do expect a few categories of transactions (such as Pre-IPO investments) to get included in the beneficial regime,” he added.
 
Should investors stay away from mutual funds despite LTCG?
 
Dalal said, going forward, the tax impact on exit gains from both the asset classes would be same and therefore, the decision is not based on tax. There is no arbitrage on investments through Mutual Funds given the 10 percent distribution tax on equity funds.
 
The decision is now a matter of non-tax factors impacting investing decision, he added.
 
Meanwhile Jagdish Thakkar, market expert and former President of Vadodara Stock Exchange has said that LTCG tax is not a bad idea, though the timing of the announcement is wrong.
 
“The government has reintroduced LTCG after it got repealed in 2004. It is not a bad tax but government should have removed securities transaction tax (STT). STT is not palatable,” Thakkar said.
 
He said that the government could have instead tried a few combinations –either tax LTCG at 5 percent or keep LTCG tax at 10 percent exceeding Rs 5 lakh or keep both LTCG and STT at 5 percent each. “Investors come to the market with full awareness on the risk front. The risk-taking investors should be rewarded and not be burdened with so much tax. However, the 'grandfathering' clause is a saving grace.”
 
Is investment in stock markets still a better idea over investment in real estate and gold?
 
Thakkar said that investors have no choice but to invest in stock market. “After the introduction of RERA, real estate is not giving any lucrative gains. The bullion market, bond market or bank deposits are not too rewarding either. In such a scenario, investors are tempted to take the risk in stock market,” he added.