LTCG tax on equities – How to calculate?

Since I have started writing this blog there has been three budgets and I normally get a lot of queries after every budget. In this budget, understandably the maximum number of queries have been in the tax treatment of equities, where LTCG has been taxed at the rate of 10 %. I was thinking of doing a post on this but a CBDT circular clarifying the different scenarios has made my task easier.

As I do not believe in reinventing the wheel, let me just reproduce here what the circular says. I am doing this so that people reading my blog have easy access to it:-

The computation of long-term capital gains in different scenarios is illustrated as under‑

Scenario 1 — An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 250.

As the actual cost of acquisition is less than the fair market value as on 31st of January, 2018, the fair market value of Rs. 200 will be taken as the cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 250 — Rs. 200).

Scenario 2 —An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 150.

In this case, the actual cost of acquisition is less than the fair market value as on 31stof January, 2018. However, the sale value is also less than the fair market value as on 31st of January, 2018. Accordingly, the sale value of Rs. 150 will be taken as the cost of acquisition and the long-term capital gain will be NIL (Rs. 150 — Rs. 150).

Scenario 3 —An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 50 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 150.

In this case, the fair market value as on 31st of January, 2018 is less than the actual cost of acquisition, and therefore, the actual cost of Rs. 100 will be taken as actual cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 150— Rs. 100).

Scenario 4 — An equity share is acquired on 1st of January, 2017 at Rs. 100, its fair market value is Rs. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs. 50.

In this case, the actual cost of acquisition is less than the fair market value as on 31stJanuary, 2018. The sale value is less than the fair market value as on 31st of January, 2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs. 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be Rs. 50 (Rs. 50 — Rs. 100) in this case.

I hope with this all the readers would have got a very clear idea on how the tax is to be calculated. However, the more serious issue is the real impact of the tax on your investments you have been making for the long term.

The news on that front is unfortunately not a good one – I will explain in the next post.

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My stock portfolio – A sector perspective

I have been very pleasantly surprised by the great response to my recent posts on my stock portfolio. While I have answered all the queries that readers had on it, I thought it will be a good idea to do a post which looks at the sectors I am invested in. This post tries to take a look at my sector wise portfolio.

A few points before I get to the sectors and the choices therein:-

  • I am only talking here of sectors where current portfolio value is exceeding 5 lacs
  • All stocks mentioned are having current valuation of greater than 50000 Rs
  • The sector classification is as per Moneycontrol portfolio. I do not always agree with that but it is logical to do this as I maintain my portfolio there.
  • For some sectors I have put notes on what type of industries are included in these.
  • The sectors are in alphabetical order, not by their values.
  • I am not explaining my stock choices here. In case you are interested in why I bought a particular stock, take the effort to browse through my blog.

So, without further ado, here are my sectors that I wanted to share:-

  • Automotive sector which today forms about 20 % of my portfolio
    • Apollo Tyres
    • M & M
    • Maruti
    • Tata Motors
    • TVS Motors
  • Banking/Finance which today forms about 5 % of my portfolio
    • ICICI Bank
    • PNB
    • Power Finance
    • Tourism Finance
  • Chemicals which today forms about 7 % of my portfolio
    • Kansai Nerolac
    • Berger Paints
    • NOCIL
    • Tata Chemicals
    • Vinati Organics
  • Consumer non-durable which forms about 5 % of my portfolio
    • Bata India
    • HUL
  • Engineering which forms about 7 % of my portfolio
    • Adani Ports
    • BHEL
    • Greaves Cotton
    • L & T
    • Siemens
  • Manufacturing which forms about 5 % of my portfolio
    • Arvind
    • Bharat Forge
    • CG Consumer
    • Himatsingka Seide
  • Metals & Mining which forms 6 % of my portfolio
    • Hindustan Zinc
    • Hindalco
    • SAIL
    • Tata Steel
    • Tinplate
    • Vedanta
  • Oil & Gas which forms 5 % of my portfolio
    • BPCL
    • HPCL
    • Pertronet LNG
    • GAIL
    • Reliance
  • Pharmaceuticals which forms 7 % of my portfolio
    • Cadila Health
    • Cipla
    • DRL
    • Piramal Enterprises
    • Sun Pharma
  • Services which forms 5 % of my portfolio
    • Apollo Hospital
    • Indian Hotels
    • Interglobe Aviation
    • Jet Airways
    • PC Jeweller
  • Technology which forms 16 % of my portfolio
    • HCL Tech
    • Infosys
    • Intellect Design
    • Mindtree
    • Palred Tech
    • Polaris Consulting
    • TCS
    • Tech Mahindra
    • Wipro

So there you have it – the above 10 sectors cover 88 % of my portfolio and the 55 companies here are the ones where bulk of my investments in stocks are. I believe most of these are good companies with decent growth potential. Many of them give good dividends which is part of my passive income.

I will be happy to answer any queries on my portfolio from the readers.

 

 

Auditing my stock portfolio – my golden dozen

At the beginning of each calendar year I try to do a comprehensive audit of my life and my financial portfolio. To me the first is important as it gives me a sense of direction and allows for any changes that I may need to contemplate. The second is to see if my current portfolio is able to sustain the lifestyle I want to be leading, now and in the future.

While I was doing this exercise for my stock portfolio over the last two days, my mind was crowded by a lot of thoughts. I want to share some of them in this post as these may be of some help to people who are building their own stock portfolio now. The context and the dynamics of the markets may have changed over the years but the fundamental principles are still the same. I also looked at the data to see which companies have helped me the most to get to my FI state – I call them The Golden Dozen and will share these too. Caveat – these may or may not be the best investments today.

Let us start with the thoughts then :-

  • Unlike most others I started with building my stock portfolio first as in 1990 there were no MF except the UTI one. 
  • Initially I invested mainly in IPO’s or Convertible debentures as it was fairly complex and tedious to get into the secondary markets. Fortunately, getting allotment was fairly easy in the 1990’s.
  • Some companies I worked for such as Satyam, HCL and Nucleus Software came out with IPO while I was there and this enabled me to get these stocks.
  • I have been fortunate to get spin off shares from some of these – for example Ultratech Cement from L & T, HCL Tech from HCL Infosystems etc.
  • The new millennium had a great impact on my disposable income and kick started the journey into the secondary markets. By this time investment could be done online and both me and my wife took to it with great enthusiasm.
  • The bulk of my portfolio was really built by my wife in the period between 2004 and 2006. I have added to it later but she is to be credited with the foundation.
  • Initially we focused on good companies and mostly bought these with a long term view. Apart from a few which we have sold, we largely retain this portfolio.
  • As it can be expected, our portfolio tanked in 2008 but we did not sell in panic. In fact I took a contrary position in 2009 and added to some select stocks. This decision has paid off handsomely over time.
  • Since 2012 my focus has really been on select IPO’s and I do not actively buy in the market. This was mainly because I wanted to get to an FI state quickly and the focus was on building up a substantial Debt portfolio for passive income.
  • My wife Lipi is now engaged in doing some trading in stocks with a small portfolio. She does not do day trading but holds for short term and sells as appropriate.

When I started this blog in 2015 I was quite transparent about my assets but since then have got a little careful based on the myriad advise I have received. On an overall scale the value of my portfolio today is 3X, where X is the amount I had invested. I do not want to get into this game of XIRR etc as I am not going to decide on whether I keep a company in my portfolio based on that. My philosophy has been that a good company is always worth holding and, in any case, if you get 7-8 successes out of 10 in your portfolio you are doing rather well. Today, though I have over 50 stocks in my portfolio, there are some which have really helped me to accelerate my journey to my FI state. I call them my Golden Dozen and am banking on them to help me the most in my second and third decades of retirement. In the first decade which starts in 2019, I do not want to sell these stocks as my plan is to focus on using my Debt part.

So finally, here is my Golden Dozen – will just give the names here without explanations. As you can imagine these are also my top holdings in my portfolio.

  • Maruti – 13 times the investment and 6 % of portfolio
  • TVS Motors – 14 times the investment and 5 % of portfolio
  • Kansai Nerolac – 18 times the investment and 4.5 % of portfolio
  • Tata Motors – 3 times the investment and 4.5 % of portfolio
  • M & M – 4 times the investment and 3.5 % of portfolio
  • L & T – 98 times the investment and 3 % of portfolio
  • HUL – 5 times the investment and 3 % of portfolio
  • Mindtree – 4 times the investment and 3 % of portfolio
  • Bata – 7 times the investment and 2.5 % of portfolio
  • Infosys – 2 times the investment and 3.5 % of portfolio
  • Palred Tech – 2 times the investment and 3 % of portfolio
  • PVR – 7 times the investment and 2.5 % of portfolio

A quick addition will tell you these currently amount to 44 % of my portfolio. Note that these are not the highest return stocks but the ones where I have made the most money in absolute terms so far. Most of these are also dividend paying companies and provide me a decent amount of tax free income every year.

I hope this post will motivate many to get started on building long term stock portfolios. Will be happy to answer any queries posted in the comments section.

My current stock portfolio – Top 5 by value

While most investors may be going through the MF route to buy equity as an asset class, there is a lot of interest in the stock portfolios of seemingly successful investors. This is amply demonstrated by the numerous requests I get for stock tips and readers wanting to know about my portfolio. I had written on this earlier but with the passage of time a few things have changed. So here is a list of my top 5 holdings.

The first in the list is Maruti Suzuki and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the Auto sector along with Tata Motors as Indian auto companies.
  • My first purchase was in 2007 June and the last in October 2009.
  • The stock has not seen corporate action in terms of bonus or splits.
  • It has normally been a good dividend paying company and in the last 2 years the dividends have been 500 % and 700 %
  • In terms of potential, this is clearly one of the best examples of an Indian company which has dominated locally and started it’s global journey now. I think it is quite possible for the stock to double over the next 4-5 years.
  • My investment in the stock is now at an average price of 678 Rs and it is about 6% of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The second one in the top 5 list is TVS Motors and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the Two wheeler sector, which is an important one for our economy.
  • My entire purchases for this stock was in the calendar year 2006.
  • The stock declared a bonus in 2010 which doubled my shares held.
  • It has normally been a good dividend paying company at around 60-80 % but last year it increased the dividends to a whopping 250 %.
  • In terms of potential, this is clearly one of the best examples of an Indian company catering to a growing local demand. I think it is quite possible for the stock to double over the next 4-5 years.
  • My investment in the stock is now at an average price of 50 Rs and it is about 6% of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The third in the list is Tata Motors and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the Auto sector along with Maruti as Indian auto companies.
  • My first purchase was in 2007 February and the last in January 2009.
  • The stock has seen a lot of corporate action in terms of bonus earlier but I only witnessed a split in 2011.
  • It has normally been a good dividend paying company at 100 % but in the past 2 years this has come down considerably.
  • In terms of potential, this is clearly one of the best examples of an Indian company which has gone global successfully. I think it is quite possible for the stock to double over the next 2-3 years.
  • My investment in the stock is now at an average price of 109 Rs and it is about 5% of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The fourth one in the top 5 list is Kansai Nerolac and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the paints sector, which is an important one for our economy.
  • My first purchase was in 2008 January and the last in January 2009.
  • The stock has declared a bonus in 2010 which doubled my shares holding.
  • It has normally been a good dividend paying company at around 100 % and in 2017 this was increased to 250 %.
  • In terms of potential, this is clearly one of the best examples of an Indian company catering to a growing local demand. I think it is quite possible for the stock to double over the next 4-5 years.
  • My investment in the stock is now at an average price of 29 Rs and it is about 5% of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The final one in the top 5 list is M & M and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the commercial vehicles sector, which is an important one for our economy.
  • My first purchase was in 2007 March and the last in January 2009.
  • The stock has seen a split in 2010 when the face value was reduced to 5 from 10.
  • It has normally been a good dividend paying company at around 200 % and more.
  • In terms of potential, this is clearly one of the best examples of an Indian company catering to a growing local demand. I think it is quite possible for the stock to double over the next 4-5 years.
  • My investment in the stock is now at an average price of 285 Rs and it is about 4% of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

As you will see from here, investing in good companies and holding them for a long period of time has really worked for me here. There are some other holdings I have that may be of interest to my readers. I will share it in a future post.

Want to build your own stock portfolio? Here’s how

I understand that getting started in stocks is not an easy thing with so many experts giving a lot of conflicting advice to you. Some will tell you that you have no hopes of building a good portfolio unless you can understand all kinds of ratios and read Balance sheets like a CA does, others will tell you that going for direct stocks is akin to a horse race where anything you bet on is almost certainly going to lose. Yet others will chide you for thinking anything beyond Mutual funds. After all they are experts and invest only in MF with all kinds of complex strategies, who are you to even think otherwise?

While all of the above has very obvious counters, read my post on Why you must be in direct equity to satisfy yourself on the importance of being in stocks. Building a long term portfolio of direct stocks does take a lot of understanding of the economy, the industry and the business. You can get these only with experience and there is really no magic potion to make you an expert overnight. There is however, a way to get started on building a portfolio of stocks, while you gain this knowledge and experience over time. Is there a guarantee that you will not lose money if you follow my suggestion? Unfortunately not, but the chances of your losing money are indeed very slim.

Without further ado, let me give you the simple steps to what you need to do from scratch:-

  1. Choose the 5 sectors – Auto, Pharma, Banks, IT and Telecom. You can add other sectors at a later date.
  2. From each sector choose 2 market leaders. You can do it by their Market caps or the PE ratios. Honestly, it does not matter a great deal as to which method you are using as long as you are consistent in your approach.
  3. For people focused on names look at DRL, Cadilla, Lupin etc in Pharma. Tata Motors, Maruti, TVS Motors, M & M in Auto etc. SBI, ICICI, HDFC Bank in banks. TCS, HCL Tech, Infosys, Wipro in IT. Bharti, Idea in Telecom.
  4. Decide on a comfortable amount that you can spend every quarter on stocks related investment. Set price triggers based on 200 DMA of the stock. For example, if the 200 DMA of a stock is 3000 and the current market price is 3200 then set the first price trigger at 3000 or just below it.
  5. Stick to this discipline and never go beyond 20 % of your quarterly money in one go. You are in no hurry, wait for the stock price to drop. In the next 6 months there will be many ups and downs. Buy only on downs, let the ups go by without bothering too much.
  6. In a quarter there are bound to be many more bad days than 5, you just need to be patient.
  7. Remember you are building a long term portfolio, so even if you miscalculate and buy at a higher price it does not matter too much. In 10 years the markets will be far higher than 9000 on the Nifty.
  8. Keep adding to each stock regularly, do not start chasing other stocks that seem to be doing better.
  9. Increase your quarterly allocation based on your surplus availability and your comfort level.
  10. Stick to this for 2 years, by then you will have enough knowledge to get to the next level of risk.

Stock investment is like swimming, you will not do it by reading how not to do it. Get started with it and you will see how things work out at a portfolio level – remember, it will never work out for all stocks that you invest in. Also, next time someone advises you on how to pick stocks, ask him about his portfolio and how successful he has been in his own stock portfolio performance. Trust only advisers who put their money where their mouth is.

I will do other more involved posts on stock picking but this one is good enough for all new investors to get started.

My stock portfolio – the third set of 5

While most investors may be going through the MF route to buy equity as an asset class, there is a lot of interest in the stock portfolios of seemingly successful investors. This is amply demonstrated by the numerous requests I get for stock tips and readers wanting to know about my portfolio. In the last 2 post I had written about my top 10 holdings. Here I will write about the next 5.

The first in the list is ITC and some observations are below.

  • My motivation for buying the stock was to get a well run mass consumer company in my portfolio. I also have HUL but ITC has performed better over the years.
  • My first purchase was in 2006 August and the last in January 2015. I had also sold off some of my shares in the interim when it hit the figure of 400.
  • The stock has seen a lot of corporate action in terms of bonus and I too got benefited by a 1:1 bonus in 2010 and a 1:2 bonus in 2016.
  • It has normally been a good dividend paying company with 500 % to 850 % rates in the last 4 years.
  • In terms of potential, this is clearly one of the best examples of an Indian company which is benefited from the local consumption story. I think it is quite possible for the stock to double over the next 2-3 years, even with the challenges in the cigarettes business.
  • My investment in the stock is now at an average price of 98 Rs.
  • I do not have any real plans to sell the stock, now or in the near future.

The second in the list is Mindtree and some observations are below.

  • My motivation for buying the stock was mainly to invest in a relatively new IT services company run by a management that had great pedigree.
  • My first purchase was in July 2007 and the final one in September 2008.
  • The stock had declared a 1:1 bonus in 2014 and  in 2016.
  • It has normally paid good dividends in the range of  100 % and more.
  • In terms of potential, the company is facing serious challenges now and this is being reflected in the declining price. However, I think it will recover in this year and it is quite possible for it to reach 1000 levels in a couple of years.
  • My investment in the stock is now at an average price of 134 Rs.
  • I have no plans of selling this stock now or in the near future.

The third in the list is Hindustan Zinc and some observations are below.

  • My motivation for buying the stock was to have a commodity based company in my portfolio and this was one of the better run companies.
  • My first purchase was in 2007 June and the last in March 2009.
  • The stock has not seen corporate action in terms of bonus or splits after my purchases.
  • It has normally been a good dividend paying company and in the last 2 years the dividends have been 300 % and 400 %
  • In terms of potential, this is clearly one of the best examples of an Indian company which has dominated locally and well on course for it’s global journey now. I think it is quite possible for the stock to double over the next 4-5 years.
  • My investment in the stock is now at an average price of 542 Rs and it is about 5 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The fourth in the list is TCS and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the IT sector as a major global player.
  • All my purchases of this stock was between January 2008 and June 2009.
  • The stock had seen a bonus of 1:1 in June 2009.
  • It has normally been a great dividend paying company and mostly paid 45 Rs dividend per share in 2016.
  • In terms of potential, this is clearly one of the best examples of an Indian company which has gone global successfully. I think it is quite possible for the stock to double over the next 3-4 years, despite the obvious challenges.
  • My investment in the stock is now at an average price of 399 Rs and it is about 4 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The final one in the top 5 list is L & T and some observations are below.

  • I bought some convertible debentures way back in 1992 and this effectively got converted into shares at a value of 60 Rs.
  • The stock has seen bonuses in 2006, 2008 and 2013 where  my numbers went up and I also sold off some at a decent profit.
  • It has normally been a great dividend paying company at around 800 % and more.
  • In terms of potential, this is clearly one of the best examples of an Indian company having made it both locally and globally. I think it is quite possible for the stock to double over the next 2-3 years.
  • My investment in the stock is now at an average price of 20 Rs and it is about 4 % of my portfolio value at CMP.
  • Based on this purchase I also got shares of Ultratech Cement free 🙂
  • I do not have any real plans to sell the stock, now or in the near future.

As you will see from here, investing in good companies and holding them for a long period of time has really worked for me here. There are some other holdings I have that may be of interest to my readers. I will share it in a future post.

My stock portfolio – the next 5

While most investors may be going through the MF route to buy equity as an asset class, there is a lot of interest in the stock portfolios of seemingly successful investors. This is amply demonstrated by the numerous requests I get for stock tips and readers wanting to know about my portfolio. In the last post I had written about my top 5 holdings. Here I will write about the next 5.

The first in the list is Kansai Nerolac and some observations are below.

  • My motivation for buying the stock was to get a Paint company in my portfolio. As I wanted to get a growth oriented company I chose this over Asian Paints.
  • My first purchase was in 2008 January and the last in January 2009.
  • The stock has seen a lot of corporate action in terms of bonus and I too got benefited by a 1:1 bonus in June 2010.
  • It has normally been a good dividend paying company at 100 % and in the past 2 years this has gone up too.
  • In terms of potential, this is clearly one of the best examples of an Indian company which is benefited from the local consumption story. I think it is quite possible for the stock to double over the next 2-3 years.
  • My investment in the stock is now at an average price of 29 Rs and it is about 5 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The second in the list is TVS Motor and some observations are below.

  • My motivation for buying the stock was mainly to participate in the two wheeler segment and I chose it over Hero Motocorp.
  • My first purchase was in October 2006 and the final one in December 2006.
  • The stock had declared a 1:1 bonus in 2010.
  • It has normally paid good dividends in the range of 75 % to 100 % and in the last 2 years this has increased to 200 % plus.
  • In terms of potential, the company is poised to grow aggressively due to the aspirations of our population. It is quite possible for the stock price to double in the next 2 years or so.
  • My investment in the stock is now at an average price of 49 Rs and it is about 5 % of my portfolio value at CMP.
  • I have no plans of selling this stock now or in the near future.

The third in the list is Dr Reddy’s Lab and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the Pharma sector and the focus it had on research as an Indian company.
  • My first purchase was in 2007 June and the last in March 2009.
  • The stock has not seen corporate action in terms of bonus or splits after my purchases.
  • It has normally been a good dividend paying company and in the last 2 years the dividends have been 300 % and 400 %
  • In terms of potential, this is clearly one of the best examples of an Indian company which has dominated locally and well on course for it’s global journey now. I think it is quite possible for the stock to double over the next 4-5 years.
  • My investment in the stock is now at an average price of 542 Rs and it is about 5 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The fourth in the list is TCS and some observations are below.

  • My motivation for buying the stock was it’s prominent place in the IT sector as a major global player.
  • All my purchases of this stock was between January 2008 and June 2009.
  • The stock had seen a bonus of 1:1 in June 2009.
  • It has normally been a great dividend paying company and mostly paid 45 Rs dividend per share in 2016.
  • In terms of potential, this is clearly one of the best examples of an Indian company which has gone global successfully. I think it is quite possible for the stock to double over the next 3-4 years, despite the obvious challenges.
  • My investment in the stock is now at an average price of 399 Rs and it is about 4 % of my portfolio value at CMP.
  • I do not have any real plans to sell the stock, now or in the near future.

The final one in the top 5 list is L & T and some observations are below.

  • I bought some convertible debentures way back in 1992 and this effectively got converted into shares at a value of 60 Rs.
  • The stock has seen bonuses in 2006, 2008 and 2013 where  my numbers went up and I also sold off some at a decent profit.
  • It has normally been a great dividend paying company at around 800 % and more.
  • In terms of potential, this is clearly one of the best examples of an Indian company having made it both locally and globally. I think it is quite possible for the stock to double over the next 2-3 years.
  • My investment in the stock is now at an average price of 20 Rs and it is about 4 % of my portfolio value at CMP.
  • Based on this purchase I also got shares of Ultratech Cement free 🙂
  • I do not have any real plans to sell the stock, now or in the near future.

As you will see from here, investing in good companies and holding them for a long period of time has really worked for me here. There are some other holdings I have that may be of interest to my readers. I will share it in a future post.