PERSONALISED INVESTMENT MANAGERS

Emotional Resistance to paying Capital Gains Tax

02 April, 2022


          
            Emotional Resistance to paying Capital Gains Tax

What is Capital Gains Tax In India?

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit comes under the category ‘income’, and hence you will need to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can be either short-term or long-term. Capital gains are not applicable to an inherited property as there is no sale, only a transfer of ownership. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will. However, if the person who inherited the asset decides to sell it, then capital gains tax will be applicable.

So why are we so resistant to paying capital gains tax when we have made money in the stock market? We are earning more, from our investments, is the reason that we are paying capital gains. Why the fuss on paying the fair share to the government? Making good profits is a good thing, and so is paying tax on it, which does not happen every year as much as we would like it to!

  • People hesitate to pay tax on capital gain and more precisely the CG tax on equity be it direct equity shares or PMS as the profit booking frequency is very high and the so is the accrual of capital gains.
  • In equity MF the scenario is quite different. Profit booking & exit in equity MF is very less from the investor’s side. Though profit booking and frequent transactions do take place at fund level, there is no accrual of CG in the hands of investors until the redemption takes place at investor level.

Just like the capital gains, sometimes we book capital losses in some of the years. These losses can be carried forward for 8 consecutive years and can be set-off against the capital gains in the respective years if any.

Please note: The losses of respective years must be filed within the original due dates failing which, carry forward and setoff cannot be done.

My other guess is that people are averse to paying taxes in general because the capital gains tax on immovable assets is economically senseless. The LTCG tax traps wealth sometimes in investment vehicles requiring special techniques to free the capital without penalty. But not so in the case of equities.

This is this epic dialogue in the Hindi movie 'Baazigar'

'Kabhi kabhi jeetne ke liye kuch haarna bhi padta hai; aur haar kar jeetne waale ko baazigar kehte hai'.

'Sometimes to win you must be prepared to lose ….and the one who wins the end game is called a Gamer (or player).'

This thinking is good because it pushes you into thinking only long-term as “Haar kar jeetna” will involve you being in the game for the long haul. In any case, forecasting the short-term psychology of the market is a very tricky affair. You may endeavor to take advantage of every rise/ fall in the markets trying to time the market instead of spending time in the market. But it is virtually impossible to judge the entire collective short-term psychology of the market. And, if you have been there for the long haul and reaped the benefits of your investment, don’t you think it is better to pay off the taxman?


Conclusion

We should know that equity market do not give consistent return every year and only provides a lumpy return. Usually this happens 2 – 3 years in every 5 years and we are happy when such lumpy profits are made so our wealth grows. We also know that many investors have got high capital gains this fiscal year, thanks to the post Covid rally.


Investing is mostly backing quality businesses run by quality managements that offer a runway for strong cash flow growth, earnings potential, and long-term prospects. Buying them at a “reasonable” price with an eye on the returns is important.

MIMI PARTHA SARATHY
Managing Director,
Sinhasi Consultants Pvt. Ltd.


Capital Gains tax should be welcomed as it signifies that you are making forward strides, protecting, nurturing and enriching your portfolio to feed your dreams and goals. If you are making money, do not hesitate to pay tax on it. And if you are making losses, do not forget to file it with IT department in time.

Most good advisors prepare a sound long term holistic financial plan for you based on your risk profile, define your financial goals along with you… do an asset allocation (with contingency plans built in) with you. They are in the best objective position to help you navigate the markets.

We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.

We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.

Reach out to us

We can help you understand how to maximise your investment goals or leave a comment below on your thoughts.

              


Bibliography

How Much Capital Gains Is Payable In India On Various Equity Classes? | Long-Term vs. Short-Term Capital Gains: What's the Difference?, INVESTOPEDIA | How to Calculate Capital Gains Tax on Shares, BANKBAZAAR | Guide to calculate tax on capital gains from stocks, mutual funds, BUSINESS TODAY


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