Last Updated : Feb 05, 2018 12:25 PM IST | Source:

Budget 2018: LTCG and DDT; is there need to restructure your portfolio?

Equities will remain attractive as it is will help in beating inflation consistently and by a wide margin.

Navneet Dubey @imNavneetDubey

After Budget 2018,  buying and selling of shares and equity-oriented funds will no longer be tax-free even if held for over a year if you realize a gain of Rs 1 lakh during a fiscal year on selling.

Finance Minister, Arun Jaitley has imposed a 10% tax on Long-Term Capital Gains (LTCG) arising out of equity shares and equity-oriented mutual funds (subject to an annual exemption of Rs 1 lakh). Further, any dividend paid out by equity mutual fund has also been subjected to 10% dividend distribution tax. “Broadly speaking, returns from equity investments (LTCG or dividend) will now be taxed at 10%. This cost will have to be factored in by the investors,” S Vasudevan, Partner, Lakshmikumaran & Sridharan told Moneycontrol.

STCG (Short Term Capital Gain) arising from selling a stock or equity fund before one year will continue to be taxed at 15%.

The stock market reacted to the new tax regime with a sharp fall post budget. “The market plunged by almost 1% soon after the announcement of the LTCG on equity investments and 10% DDT. However, equity investors—including mutual fund investors—might absorb the blow and keep investing as per their financial objectives since equity remains one of the best-performing asset classes,” Adhil Shetty, CEO said.

However, Abhinav Angirish, MD, Abchlor Investment Advisors Private Limited said that this will not only increase volatility but also induce short-term investments as earlier the bracket between short term and long term capital gain was 15%, which was just enough for the investors to keep the patient in the market and now it is only 5%. “Going ahead, investors may be booking profits sooner since the 5% of tax saving won’t be a great incentive as compared to the risk of loss which an investor could face in future,” he said.

What to do with your portfolio?

Rahul Parikh, CEO, Bajaj Capital said that he believes taxation is critical to investments as investors are concerned with net post-tax returns in their hand. However, its impact on asset allocation in your investment portfolio need not be direct or linear. The introduction of LTCG shall bring down an investor’s long-term return expectations from equities, but equities will remain attractive as it is will help in beating inflation consistently and by a wide margin.

“The broad asset allocation need not change. However, an investor who has attached a financially quantifiable goal to the investment may need to either elongate the investment horizon or increase the principal invested in order to get the same amount at the time of redemption/maturity,” he said.

How to go about with asset allocation?

The new taxes may bring volatility in the market in short run but investors should remain stay invested and unlikely to restructure their equity investments. Markets trends should be the deciding factor to take a call on your investments irrespective of the new tax regime getting imposed.

Strategic asset allocation can be the key to set your investment target allocations where one should periodically rebalance their portfolio, preferably taking the help of an investment adviser. You need to align your investment returns with proper asset allocation percentages that meet your long-term financial goals. While applying this strategy, you should buy and hold the asset, rather than following an active trading approach, till the time you achieve your financial goals. Although, over a period of time your goals and needs can change and as the time horizon for major goals like retirement and meeting one's education goal become shorter, you with require to follow the same strategy.
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First Published on Feb 5, 2018 12:25 pm
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