Oops!!! It’s LTCG Tax on Equities

Impact of LTCG tax on indian stock market

Finally the most awaited Budget for 2018 was presented in Parliament on 1st Feb 2018. Budget’s main Focus was on Agriculture, Rural India, Infrastructure, Health Care, Employment generation. It was mentioned that Indian Economy is likely to expand 7.5% in FY 2018 and India on Course of 8% GDP growth.

But the Party Spoilers were-

  • Current Year’s Fiscal deficit of 3.5% as against estimated 3.3% and next year’s estimate of 3.3% revised from earlier 3.2%
  • No major changes in personal income tax that could enthuse salaried middle class

and major shock to the stock market investors –

Introduction of 10% LTCG (Long Term Capital Gain ) Tax of on Sale of Equity and Equity Mutual Fund Units

Before Budget, there were concerns of probable introduction of Long Term Cap Gain Tax on Equities but those were counter –argued by probable adverse impact on Government’s disinvestment program.

Now as the LTCG Tax is the reality, let’s discuss its probable impact on the Stock Market

  • 10% LTCG Tax on gains above Rs 1 Lakh from sale of equity shares and Equity Mutual Fund Units  is effective from Assessment Year 2019-20 i.e. F.Y. 2018-19.   Thus LTCG arising from sale of shares, Equity MF Units before March 2018 is tax exempt.
  • In Recent few years, Equity Investors have made significant profits from their investment in Equities.
  • Currently Small cap and Mid-cap stocks are significantly overpriced as compared to intrinsic value of their businesses. Large caps though relatively reasonably priced, are still expensive compared to their respective intrinsic values
  • In the Current Euphoric Scenario, Equity Investors are likely to book huge excess profits which they have earned beyond their expectations  before March 2018 as these profits would be tax exempt
  • As per the Proposed Change  , Profits earned before 31st Jan 2018 are grandfathered and only Highest Market Value as on 31st January 2018, would  be considered as cost of acquisition for calculation of LTCG . Again concessional tax rate of 10%.would be calculated only above capital gain of Rs 1 lakh. Thus tax impact would be minimal as compared to profits earned from investment in Equities.
  • But Behavioral bias of Investors towards “Tax Exempt” profit as against “Taxable” profits would force investors to take the excess profits off the table before March 2018.
  • Again Overpriced Global Markets, Increasing Crude Oil price, higher US Bond Yields, higher Bond yield in India are triggers for “Sell” decision as well.
  • The impact of LTCG tax and all above factors is likely to take speculative/weak hands out of the market. Again especially in recent years significant liquidity inflows were coming through Mutual Fund SIPs. Introduction of LTCG Tax may have adverse impact on this liquidity inflows.

There lies Ray of Hope for Long Term Value Investors!!!

 Technical Analysis:

Market has commenced reacting to LTCG Tax.  NIFTY 50 has declined from its 1st February 2018’s Top of 11117 to Today’s low of 10746 (2nd February 2018) i.e. 3.3% and closed at 10,760.

NIFTY made peak of 11,171 on 29th Jan 2018.  Thus on weekly Chart, NIFTY has made Top and closed near Week’s low. It has also taken out previous week’s low 10881. The aforesaid formation indicates bearish signal.

In our previous blog, Are We on the Verge of Significant Market Correction, it was mentioned that NIFTY was likely to get resistance in the zone of 10800-10900 and if taken out then significant resistance in the zone of 11300-11500, It seems that NIFTY has reversed from 130 points earlier from the zone 11300-11500.

Going Forward on Daily Chart, NIFTY is likely to get support first at 10400-10500 and if not sustained then 10000-10100, on weekly chart, first support is at 10000-10100 and if not sustained then 9600-9700, on upside, 11100-11200 now poses significant resistance for NIFTY.

Daily Chart –NIFTY dated 2nd February 2018

NIFTY technical analysis daily chart

Weekly Chart- NIFTY dated 2nd February 2018

NIFTY technical analysis weekly chart


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