By Joydeep Sen
When it comes to tax organizing, persons assume of Section 80C and other investments. What we will talk about now is distinctive it will give you tax advantage, not today, but in the future. This is in the context of your investments in equity mutual funds and/or equity stocks. In equity funds development alternative / equity stocks, it becomes lengthy term from the tax viewpoint right after a holding period of 1 year. The taxation rule is, on your gains you spend tax at 10% plus surcharge and cess as applicable, on gains more than Rs 1 lakh per economic year. That is, up to Rs 1 lakh of lengthy term capital gains (LTCG) per year is no cost from tax beyond that you spend 10%.
How it functions
There is a way of creating tax efficiency. Since equity investments are meant for the lengthy term horizon, you successfully remain invested. As and when the cost / NAV moves up, you can sell (i.e. book the gains) and obtain the identical share / MF scheme. How does it support? It aids to generate a larger acquisition price for your ultimate taxation, when you sell the investment right after an sufficient period of holding.
For taxation of equity, January 31, 2018 is identified as the ‘grandfathering date’ i.e. rates / NAVs prior to this date are not relevant and cost on this date becomes the price of acquisition. Let’s say the cost/NAV as on January 31, 2018 was Rs one hundred and you would sooner or later sell it right after 10 years when the cost would be, say, Rs 200. At that point, you would spend tax on Rs 200 minus Rs one hundred = Rs one hundred. You would spend tax in that economic year (as per present guidelines), on the gains more than Rs 1 lakh. Let us say today, right after the rally in equities, cost/NAV has moved up to say Rs 130 as on December 2020. Today, if you sell the share / MF scheme at Rs 130 and obtain it once again, as lengthy as the gains, i.e., Rs 130 minus Rs one hundred = Rs 30 is inside Rs 1 lakh in the economic year, it is tax no cost for you.
Paying tax
Through this transaction, your price of acquisition for tax purposes moves from Rs one hundred to Rs 130, which will be relevant when you sooner or later sell it right after yet another, say, seven years at Rs 200. At that point, your gains will be Rs 200 minus Rs 130 = Rs 70 rather of Rs one hundred. Let’s say you invested Rs 10 lakh in equity MFs more than 1 year ago and the portfolio worth today is Rs 10,80,000. You can redeem the complete portfolio as the gains are inside Rs 1 lakh. If the market place worth of the portfolio today is, say, Rs 12 lakh, then for executing this technique, you have to sell as considerably so that your gains are inside Rs 1 lakh to prevent tax.
This discussion assumes you invested in the fund lump sum and exited on a specific date. However, you may perhaps have invested by way of a Systematic Investment Plan (SIP) and may perhaps withdraw by way of a Systematic Withdrawal Plan (SWP). In that case, NAV of your earliest investment will be taken, which is named First In First Out (FIFO). For instance, if you did an SIP from January 1, 2019 to January 1, 2020 and exit today, the acquisition NAV as on January 1, 2019 will be relevant and then the subsequent instalment will be regarded. If you do an SWP from January 1, 2021 onwards, the earliest investment will be regarded for taxation, for each exit.
Maximising gains, minimising tax
The taxation rule is, on your equity gains, you spend tax at 10% plus surcharge and cess as applicable, on gains more than Rs 1 lakh per economic year
Sell in a market place rally as considerably so that your gains are inside Rs 1 lakh to prevent paying tax and reinvest in the identical shares to enhance your acquisition price for final sale at a later period
If you have invested by way of a SIP and withdrawn by way of SWP, NAV of your earliest investment will be taken, which is named First In First Out
(The writer is a corporate trainer (debt markets) and an author)