What does it mean for Retail Investors invested in Stocks and Equity Mutual Funds?
The gains made by retail investors in the stock market till 31st January, 2018 will not be subject to tax.
The gains made by Equity Mutual Fund investors in Equity Mutual funds till 31st January, 2018 will not be subject to tax.
Here is an example of how LTCG affects our investments -
Gross rate of growth of 12% assumed in the investments (before taxes)
To escape tax, you can sell it at the end of 3 years. But then you should make sure you invest the sales proceeds in an equally well-performing asset.
If you continue to remain invested, the returns do get impacted but it is not a big factor that warrants for a major change in your investment strategy.
Many people are not too happy about one more income stream getting taxed. There is no way to avoid paying the tax but we can try to reduce the impact of the LTCG on our finances -
Stay Invested for the Long-Term – In the long term (more than one year), gains over Rs. 1,00,000 will be subject to tax. But the longer you stay invested, the power of compounding will enable you to earn optimum returns as the investment is for a longer term and the returns in the form of value appreciation that are reinvested stay invested for a longer term. In case of selling in the short-term, the tax payable is more and you have to bear transaction costs and also invest time and effort in choosing the right stock.
Manage Your Investments – If you want the same returns as the previous years, you have to increase your investment by 10%-12% so that the absolute returns are not affected. You can increase the amount in SIPs and increase your allocation to equity based assets. Consider ELSS mutual funds as they are tax savers.
If you have been withdrawing profits from different mutual funds using the SWP scheme, check if you really need to do that and check the amount.
Use Your Losses – Have you made losses in the financial year in any capital assets. These can be set off against the profits that are taxable. So use these losses to reduce your tax liability.
it is large as the tax outgo is Rs 1 lakh per financial year and reduce LTCG tax outgo
Churn Your Portfolio? – Many people advice to reduce your tax liability is to book profits up to Rs. 1,00,000 and then invest the profits into another asset that gives similar or more returns or in the same asset. It is also advised to keep a gap between the sale and re-purchase transactions so that there is no confusion over tax liability. This strategy can be applied to stocks provided you are able to buy stocks at the lowest level each time. This is usually not possible. Moreover the stock market is volatile which makes such buying and selling decisions difficult. In case of Mutual Funds, if you have booked profits, it means the NAV value is higher. If you are investing in the same MF scheme, you should consider why the NAV is higher? Is it just because of the market buoyancy or the value per unit is really worth the NAV?
Your returns will not be at the optimum levels unless the markets perform extremely well in that period when you hold it. This cannot be predicted accurately.
One has to consider the transaction expenses, transaction taxes and effort and time spent in this exercise and evaluate if it is a better option than paying 10.04% tax. Churning of portfolio is not a great option if the investment is large as the expenses, time and effort will be more and you will lose out on compounding effect of investment returns.