No Grandfathering in 2024?

On February 1, 2018, when Mr. Arun Jaitley raised Long Term Capital Gains (LTCG) tax on listed shares from 0% to 10%, he had an important accompanying statement in his budget speech: “…all gains up to 31^stJanuary, 2018 will be grandfathered.” This ensured that the tax was prospective from February 1, 2018 and not applicable retrospectively on accumulated unrealised gains on securities held for many years before that date. Crucially, the grandfathering clause is not present in Ms. Nirmala Sitharaman’s budget speech of July 23, 2024, in which LTCG tax was increased from 10% to 12.5%. This means that any unrealised gains between February 1, 2018 and July 22, 2024 will, if and when realised, be liable for the incremental tax, in addition to any gains realised prospectively from the date of the announcement. (Since I’m no tax expert, I can only wonder what happens to those unfortunate souls who traded between market opening and 12:18pm on July 23^rd expecting a 10% tax on their gains).

All-in-all, for the long-term investor earning mid-teen returns on their portfolio, this should not pinch too much but, as a matter of principle, this point seems to have been lost in the noble attempt to simplify LTCG tax for different asset classes.

Tax stability and planning are important to investors, and governments should try not to change the rules too often.

However, as investors we must remind ourselves that taxes are not more important than the investment decisions themselves. An excellent investment opportunity that is likely to produce 20, 30 or 40% per annum pre-tax returns should not become undesirable due to marginal or even material changes in the capital gains tax rate. This is even more true for the long-term investor who can defer the tax payment for years or even decades.