The real impact of LTCG might go up to 40%

The real impact on your returns of the restoration of the long-term capital gains tax will be far more than the 10% that is immediately visible.

For the individual saver-investor the restoration of the long-term capital gains tax on equity investments is the biggest change for a long time. In fact, it's probably the biggest change since this tax was abolished. However, many of us understood that this day would come, at least since the time in December 2016 when the Prime Minister said in a speech, "For various reasons, the contribution of tax from those who make money on the markets has been low … to some extent, the low contribution of taxes may also be because of the structure of our tax laws. Low or zero tax rate is given to certain types of financial income..."

What complicates matters is that this tax could cost you a lot more than 10% -- you could actually lose 30 or 40% or even more of your returns, depending on how you invest. Over a long period like ten or fifteen years, no equity investor is going to hold the exact same investments. At some point, they would sell some of their holdings and buy something else. Given the structure of tax laws, capital gains would be taxed on each such switch, leading to less capital being available for compounding subsequently. The eventual impact would be quite large, but would differ for each investor depending on their buying and selling pattern.

There are three ways of reducing this impact on your returns. The first is obvious -- don't buy and sell frequently. Choose all-weather stocks that will stand the test of time so that your holding period is long. The enhancement in your eventual returns will be huge. The second--and most useful--is to invest in mutual funds instead of buying and selling equity directly. A mutual fund investor can get the same returns but needs to buy and sell much less frequently. The trading is done inside the fund's portfolio by the fund manager.

However, as long as the investor holds on to the fund, there is no taxable event. The third method is marginally useful and would take some understanding and work. Since Rs 1 lakh of gains every year are tax free, at the end of every year, you could sell investments that would generate that much returns and immediately buy them again. It would save Rs 10,000 a year, and the complications may be worth your while, or they may not. There are other side effects of this tax too. Most investors think that tax-saving (ELSS) fund investments are completely tax-free, including the returns thus generated. This is no longer true, subject to the Rs 1 lakh limit.

This is not a pay-and-forget tax. Instead, it will require equity investors to learn new tricks and make many adjustments.

(The author is the CEO of Value Research)