How To Save LTCG On Equity Mutual Funds?

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The Finance Minister Arun Jaitley, presented the Union Budget on February 1^st 2018. The Finance Minister had plenty of goodies for farmers, MSME, job seekers and healthcare for rural citizens of India. Arun Jaitley even introduced the World's largest healthcare program.

PM Narendra Modi presented his pro-poor image in a big way. But, he had some bad news for the rich. An LTCG tax of 10% was introduced on equity-oriented mutual funds. All capital gains till Rs 1 Lakh a year, would be tax-exempt. LTCG tax of 10% would be effective from April 1^st 2018 with grandfathering.

Hearing this bad news the stock markets would have collapsed...but, they didn't fall much. The reason for this was Arun Jaitley introduced the grandfathering clause. A grandfathering clause allows you and other people who have made investing decisions under the old law, to continue to enjoy concessions until a particular time frame.

Grandfathering clause is an exemption granted to you and other existing investors on equity shares and equity-oriented mutual funds, on profits made till January 31^st 2018. The grandfathering clause says that there will be no LTCG tax on notional profits in equity shares/mutual funds.

Is there any way you can escape paying LTCG tax of 10% on mutual funds and shares? Yes, there is. Let's find out how you can do this

How to save LTCG on equity mutual funds?

 

There's an easy way to solve this problem. Even though all your long-term capital gains are tax-exempt till 31^st January 2018 (grandfathering clause), there's a real easy way to escape this tax. All you have to do is sell your investments in equity-oriented funds, where you have stayed invested for a year or more, before March 31^st 2018.

If you don't need the money, don't sell your equity-oriented mutual funds, just to save LTCG Tax. If you want to rebalance your portfolio (The desired amount to be ideally maintained in equity and debt), then this is an excellent time to do so. Sell your underperforming equity mutual funds and shares which you have held for a long time, before 31^st March 2018.

1. How much LTCG Tax you pay on equity mutual funds?

 

FM Arun Jaitley has introduced an LTCG Tax of 10% on equity-oriented funds. You also have the grandfathering clause which takes into account, your actual purchase price, fair value which is the value as on January 31^st 2018 and the final selling price.

This table explains how much LTCG Tax you pay on equity mutual funds.

 

 

2. Avoid churning your equity mutual fund investments?

 

Buying and selling your equity mutual funds frequently, is called churning. Every time you sell your equity mutual funds, you have to pay tax. If you sell equity mutual funds before a year, you pay short-term capital gains (STCG) tax of 15%. If you sell equity mutual funds after a year, you pay long-term capital gains (LTCG) tax of 10%, if LTCG is above Rs 1 Lakh in that financial year.

Simple...If you keep churning your equity mutual fund investments, you will pay tax.

To avoid paying tax (STCG or LTCG), you must invest in consistent-performers. Invest in equity funds which are consistent-performers. This way you don't have to sell regularly (churn), and you save on tax.

Investing in equities is for the long-term (5-7 years). But, if you invest in under-performing equity funds, you would be stuck with them and suffer heavy losses. Invest only in consistently-performing equity funds, which have regularly beaten benchmarks.

3. Exit ELSS because of LTCG Tax?

 

ELSS invests most of your money in stocks. ELSS used to enjoy EEE benefits. Your investments in ELSS enjoy tax deductions under Section 80C, up to Rs 1.5 Lakhs a year. The returns you get and the withdrawal at maturity was tax-free.

Now, there's an LTCG tax of 10% on withdrawals from ELSS if, LTCG is above Rs 1 Lakh. While PPF and EPF continue to enjoy EEE benefits, many investors believe that ELSS might not be a good investment after LTCG Tax. So...should you exit ELSS investments just because of LTCG? ELSS has been the favorite of many risk-taking investors, because of the high returns it has given in the past. So don't run away from ELSS.

ELSS forces you to stay invested in equities for the long-term, because of its 3-year compulsory lock-in. An investment in equity generally performs well, over the long-term. So continue to invest in ELSS via SIPs.

Aggressive investors must invest in ELSS as even with LTCG tax, returns are higher than PPF and EPF. With a short lock-in of just 3 years, ELSS remains the best investment to save tax. Be Wise, Get Rich.

SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich - Best ELSS Funds

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