1. Budget 2018 and LTCG on equities: 3 strategies to help you minimize your tax expense

Budget 2018 and LTCG on equities: 3 strategies to help you minimize your tax expense

Budget 2018: After Finance Minister Arun Jaitley introduced Long Term Capital Gains Tax on equities in Union Budget 2018, investors would be on the lookout for various strategies to minimise their tax outflow, top fund managers point out that it would be imprudent to sell away all holdings.

By: and | Updated: February 6, 2018 4:52 PM
Mismatch in Form 26AS, ITR details? You won't get demand notice from taxmen now Budget 2018: Finance Minister Arun Jaitley said that it was the most appropriate time to introduce long term capital gains tax on equities in Union Budget 2018. (Image: Reuters)

Budget 2018: After Finance Minister Arun Jaitley introduced Long Term Capital Gains Tax on equities in Union Budget 2018, investors would be on the lookout for various strategies to minimize their tax outflow, top fund managers point out that it would be imprudent to sell away all holdings. The fact that the gains made up to January 31st are grandfathered, and the ongoing correction in the stock market make this alternative all the more unappealing.  “Post grandfathering and recent correction there is no sense in booking capital gains unless one want to completely exit the equity market,” Alok Singh, Chief Investment Officer, BOI AXA Mutual Fund told FE Online. What are the other strategies investors should explore?

Watch Video: Five key takeaways for Indian stock markets.

Also read: Budget 2018: Worried about LTCG on equities? Here’s why investing in stocks still remains attractive

Use the Rs 1 lakh exemption limit

Though the strategy may take extra effort, the investors may also use the Rs 1 lakh exemption limit to their advantage, by ensuring that they book long term capital gains of below Rs 1 lakh in the year, to continue to enjoy tax free profit. “Investors should acknowledge that the long term investment decisions have to be based on the return profile of the asset class over the period of time and 10% LTCG doesn’t change that for Indian equities. However, Investors can try to use Rs 1 lakh exemption limit every year,” Alok Singh said.

On similar lines, Deepak Shenoy, Founder, Capitalmind tells FE Online, “ Taxes should not be the reason why you invest. You invest to make money, over the short or long term. Taxes like a 10% tax are not relevant because otherwise you wouldn’t find people investing in heavily taxed FDs.” In a telephonic interview with FE Online, Asif Iqbal of Escorts Securities says that the ongoing correction is likely to continue, and it’s likely to remain a traders market as opposed to an investor’s market, as people look to exit their positions in the near term. According to the expert, the markets are likely to remain volatile during the year, and investors may look to enter the market after a correction of up to 15%.

Invest in growth options in mutual funds as opposed to dividend option

After the introduction of Dividend Distribution Tax in equity oriented mutual funds, experts point out that investing in growth option may be a better choice. Even though the investors will have to pay the Long Term Capital Gain tax even on profits made from mutual fund investments exceeding Rs 1 lakh, experts say that at least the dividends may be reinvested in the case of growth options, as the fund will not have to pay the 10% dividend distribution tax.

Calculate: Income Tax Calculator: Find out how Budget 2018 will impact your finances

Sell the stock at slightly below Jan 31st 2018 highest price

As the gains made till 31st of January 2018 are fully grandfathered, investors may sell the shares (after holding it for a period of more than 1 year) at a price just below the highest price traded on January 31st or before (in case the shares didn’t trade on January 31st). Interestingly, in this case, investors may make a profit even beyond Rs 1 lakh and continue to pay nil tax. We explore this case in slight detail.

Suppose the investor purchases a single share of ABC company on 1st of January, 2017 at Rs 100, its fair market value is Rs 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at Rs 150. In this case, the actual cost of acquisition (ie. Rs 100 as on 1st January 2017) is less than the fair market value ( as on 31st of January, 2018 (ie. Rs 200). However, the sale value as on 1st April 2018 (ie Rs 150) is also less than the fair market value as on 31st of January, 2018. Accordingly, the sale value of Rs 150 will be taken as the cost of acquisition and the long-term capital gain will be NIL (Rs 150 – Rs 150).

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