This move by the government may not be very encouraging for investors but it does not spell doom yet. We try to give a clear idea here, on the implications of the newly introduced clause of LTCG tax on your earnings. In other words, we equip you with relevant information so that you can zero in on the perfect investment strategy that best suits you.

Important points:

• The LTCG tax is 10 per cent with no indexation benefit for equity investments.
• LTCG exempt is up to Rs 1,00,000: This is a universal annual limit that includes LTCG earned from all the equity investments put together. For example, if you earned a total LTCG of Rs 1,50,000 by selling various investments throughout the year, the taxable LTCG is only Rs 50,000. The tax liability is Rs 5,000 (10 per cent of 50,000).
• Exemption till 31st March 2018: This means that if you book LTCG before March this year, you are not liable to pay any tax even if the gains exceed Rs 1,00,000.
• Cost reset date is 31st January 2018: If LTCG is booked in the next financial year (starting 1st April 2018) the cost price of the investment will be adjusted to the price as on 31st January 2018 for the tax liability calculation. However, if the investor has earned a loss with respect to the original purchase price, there is no LTCG tax to be paid.

Let's see how this plays out in different scenarios for investments made before 31st January, 2018:

Scenario 1
Purchase price on 1st January, 2013: Rs 100
Price on 31st January, 2018 (reset date): Rs 300
Selling Price on 1st March, 2018: Rs 350
As the long term investment is sold before 31st March, 2018, there is no tax liability.

Scenario 2
Purchase price on 1st January, 2013: Rs 100
Price on 31st January, 2018 (reset date): Rs 300
Selling Price on 1st June, 2018: Rs 350
As the long term investment is sold after 31st March, 2018, there is a tax liability to be paid. The deemed cost price for the tax calculation will be Rs 300. Thus, LTCG will be Rs 50 (350-300).

Scenario 3
Purchase price on 1st January, 2013: Rs 100
Price on 31st January, 2018 (reset date): Rs 50
Selling Price on 1st June, 2018: Rs 110
In this scenario, the cost price on the reset date is below the original purchase price. Hence, the tax liability will be computed on the original price ignoring the price on the reset date. Thus, investor is deemed to have earned LTCG of Rs 10 (110-100) and the tax liability is Rs 1 (10 per cent of 10).

Scenario 4
Purchase price on 1st January, 2013: Rs 100
Price on 31st January, 2018 (reset date): Rs 130
Selling Price on 1st June, 2018: Rs 110
Here the investment is sold below the deemed cost price of Rs 130. Investor will not have to pay any LTCG tax even if the selling price is above the original purchase price.

What should you do now?
Nothing. Stay put. Don't sell investments only because LTCG tax has been introduced. This would be simply foolish. Any move taken while in a state of panic can only lead to losses.

Paying taxes reduces the returns earned. But if the investments are held for a longer period of time, tax liability reduces considerably. The trick is to hold onto the investments longer to avoid booking  higher taxes on LTCG.

We demonstrate in the table below that the longer you hold on to an investment, the tax drag reduces and returns increases.

As you can see, if the investment is sold after 10 years the post-tax return for the investor is 14.1 per cent as compared to 13.5 per cent after one year. Thus, the investor is better off by deferring the tax payment.

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