2W Rebalance Tax Math

Friend pinged on Tuesday evening with the same WhatsApp objection I have heard maybe fifty times now. "Every two weeks rebalance means you pay STCG on every cycle. The taxman eats the alpha. A one year hold has to win after tax."

The first half of that is correct. The leap to the verdict is not.

Pulled up the math.

Short-term capital gains on equity, 20 percent. Long-term capital gains on equity, 12.5 percent beyond the Rs 1.25 lakh annual exemption. The short-term bracket is a 60 percent higher rate. That is the part the objection gets right.

Then run the two strategies on the same Rs 10 lakh, one year forward, with realistic gross returns.

A one year buy-and-hold of the Nifty 50 TRI sits on roughly 14 percent gross long-run. Net of LTCG drag at 12.5 percent on the gain above the exemption, the cheque is around Rs 11.23 lakh. Tax drag is light. Return is light. Both are light.

A 2-week systematic rebalance on a five year backtest of the Large Midcap engine sits around 40.85 percent gross CAGR. Net of STCG drag (roughly five percentage points off the top once you tax every realised cycle at 20 percent), the cheque is around Rs 13.59 lakh. Tax drag is heavier. The cheque is heavier by more.

The bigger bracket hands Rs 2.36 lakh more to the bank account in the same year.

The arithmetic is simple. A 60 percent higher tax rate loses to a 192 percent higher gross return every single time. The tax is a percentage of the gain. It is not a tax on the rebalance.

Honest version: stop comparing tax rates. Compare after-tax cheques on the same corpus. Whichever number is bigger wins. Brackets do not