How capital gains tax affects a momentum strategy in India

A momentum strategy buys and sells regularly, so tax can take a noticeable share of its return. Here is how capital gains tax works on listed shares and equity-oriented funds in India, and why it matters for rule-based strategies.

Short term or long term?

For listed equity shares and equity-oriented funds on which STT is paid:

• Sold within 12 months of buying: a short-term capital gain (STCG).
• Held more than 12 months: a long-term capital gain (LTCG).

Current rates (for sales from 23 July 2024)

• STCG: 20% (it was 15% before that date).
• LTCG: 12.5% on gains above ₹1.25 lakh in a financial year (it was 10% above ₹1 lakh before).
• Health and education cess of 4% applies on the tax.

Losses can be set off: short-term losses against short-term or long-term gains, long-term losses only against long-term gains, and unused losses can be carried forward for eight years if the return is filed on time.

Why it matters for momentum

Most momentum strategies rebalance monthly or weekly, so many holdings are sold within a year. Their gains are mostly short-term, taxed at 20%, every year. A strategy with a slightly lower return but longer holding periods can sometimes keep more after tax.

Compare strategies on what you keep, not only on the headline return.

In MomentumScore

Every backtest report has a Tax tab. It estimates, year by year, the short- and long-term gains, applies the rates that were in force on each sale date, sets off losses, carries them forward, and shows the return after tax.

This is an estimate for learning. Your own tax depends on your full income and situation, so please confirm with a chartered accountant.