Invest more to make up for lower returns

The announcement of the

LTCG

tax has rattled the stock market. The attractiveness of equity compared to debt funds stands eroded because its tax advantage is now gone. Holding equities will also get costlier now.

Given that LTCG on equities is tax free only up to ?1 lakh per financial year, investors need to pare down their return expectations and

invest

more to achieve your goals. The additional amount you need to invest to build the desired corpus goes up significantly, with longer holding periods (see table). This is because the impact of a 1% cut in returns on account of LTCG tax gets significantly higher with longer investment periods due to compounding.

Another strategy can be to make use of the tax exemption provision and book profits up to ?1 lakh per financial year and reduce LTCG tax outgo. Please note, you can’t carry forward the ?1 lakh sum—you cannot claim ?10 lakh exemption over a 10 year period. So, you will have to book profits each year.

The benefit of this regular churning will depend on the size of your total corpus. While it can work well for retail investors whose portfolio size is small, it can become less effective for for highnet individuals.

If you are interested in following this strategy, you should keep two things in mind. First, you must reinvest the proceeds and not divert them for consumption, or you will miss out on the power of compounding and put your goals at risk. Second, you need to know about tax rules. There won’t be any issues, if you are shifting from one stock or mutual fund to another.

Finally, a word of caution for those looking to invest in Ulips. Since the commission on low-cost

Ulips

is minimal, agents won’t push them. So you may be miss-sold high cost Ulips or other opaque insurance products such as traditional plans. High surrender charges is another issue. Also, Ulips tax advantage could also be taken away.