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Feb 01

What is in the budget for equity investors?

Every year, during the budget season, the salaried classes worry about tax benefits, corporates hope to have lower taxes, while farmers dream of subsidies for raw material. With the general elections around the corner, the government is keen on pleasing the farmers—India is largely an agrarian economy and more than 50% of the jobs are in this sector—and Finance Minister Arun Jaitley has presented  a budget accordingly.

 

Is it populist? No. A lot of thrust has been given for the earnings of rural people. This, the finance minister hopes, will enhance the cash at hand for farmers and it will push up consumption. This will directly help the economy, mostly consumption-based industries. Mr. Jaitley has tried to move away from freebies and concentrate on performance.

 

After a gap of 13 years, long-term capital gains are back in the equity market. How far will it impact investors? Whatever your earnings, you will lose 10 per cent of it. But there is one relief for existing investors. For old investments, capital gains will start from February 1. So, profits made till January 31,2018—during this period, the market hit the peak—will not be touched(Note for small investors upto Rs 1 lakh profit is exempted from LTCG).

 

You can understand it better by going through this table.

Long-term Capital Gains (LTCG)
Scenario 1: NAV Sold on or before 31.3.2018 Nil
Scenario 2: NAV purchased before 31.1.2018 and sold after 31.3.2018(one-year)
Purchase price 100
Highest Price as on 31.1.2018 125
Sale price 140
TOTAL LTCG 40
Exempt LTCG 25
Taxable LTCG 15 Tax @ 10%
NAV purchased after 1.2.2018 held for 12 months Tax @ 10%

 

 

So, do you need to worry about your returns? At any point in time, investors should look for return on investments ahead of tax. If the post -tax return is better than other asset classes, there is nothing to worry about.

For a long time, we were against dividend-based advice for the investors in equity assets. We suggested only systematic withdrawal for regular cash flow. With lots of mis-selling in dividend based balanced funds in lieu of fixed deposits, the government introduced 10% tax on dividend distribution. So, this is a slight disappointment for investors who moved their money to equity balanced funds for dividends. But this will be applicable only from April. So, you have time for course correction on your portfolio.

 

With huge money likely to be spent on farming, railways, and health sectors, the economy is likely to rebound. So, for long-term investors, there is nothing to worry about.

 

From an investment point of view, focus on asset allocation and keep investing. Any market movement will not disturb you. Remember the comment of Robert Arnott: “In investing, what is comfortable is rarely profitable.”

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