Reeling under high inflation and uncertain investment environment, the common man and small investors had lots of expectations from the Union Budget 2018. However, not only their expectations got belied, but certain new tax provisions have now been made by FM Arun Jaitley, which have made investors a worried lot today. For instance, long-term capital gains (LTCG) arising out of the sale of equity shares and equity-oriented MF schemes will be taxed now at the rate of 10% without any benefit of indexation, if the capital gains exceed Rs 1 lakh in a year.
Thus, according to financial and tax experts, after the new proposals of the Union Budget 2018, there are a very few options left for investors to earn tax-free returns. However, you need not worry as there are still some ways – especially for small investors – which can help you earn tax-free returns despite these new provisions.
Here we are taking a look at some of them:
1. Sell funds containing total gains below Rs 1 lakh
You can always sell a basket of funds that contains the total gain below Rs 1 lakh. Say, your total gains are amounting to Rs 1,20,000 before you decide to sell. Assuming that they are a basket of stocks or funds and not a single one, recalculate the stock selling options to keep it below Rs 1 lakh. In that case you will not have to pay any tax.
“Now this money can be invested again in newer funds or stocks or in any other mode of investment you want. This method may, however, minimize your opportunity in getting higher returns as you cannot always control which stocks or funds will reach a peak point, where it is lucrative to sell. And in such a scenario the gain may well over spill beyond Rs 1 lakh,” says Adhil Shetty, CEO, Bankbazaar.com.
2. Don’t manage portfolio jointly
Small investors can save tax by dividing their portfolio into as many folios as possible. “Typically families manage their stock and mutual fund investments through one account. It now makes sense to have a separate account for each family member. Then each member will be entitled to their own limit under the capital gains tax law. You, however, need to remember that for this your family members should be above the age of 18. Needless to say each of these accounts have to be in conformity with the law,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
3. Hold mutual fund portfolios for more than 3 years
The other window available for debt investors is to hold their mutual fund portfolios for more than three years. This will allow you to take advantage of indexation allowed in debt funds, which will allow you enjoy steady returns at very low tax rates.
4. Avoid Churning
Remember that every withdrawal after one year will result in LTCG tax. Now “if any investor invests with the objective of booking profits in 2-3 years and then reinvest and again book profits, then in that case the LTCG tax hit will be double. Hence, investors will benefit more if they align their investments with their goals so that you sell your funds only when the money is being utilized,” suggests Jitendra P S Solanki, MCSI, CTEP, CFP, and the Author of ‘Financial Planning for Special Needs Children Families’.
5. Dividend Distribution Tax
Over the last few years, many investors have started relying on regular dividend from equity mutual funds for regular income. However, FM Arun Jaitley has in the Budget 2018 proposed to introduce dividend distribution tax (DDT) on equity MFs. Because of this provision, mutual fund companies will first deduct this tax from the dividend surplus and then distribute the dividend. In other words, “investors will receive dividend only after the company has paid tax on that corpus. So, income from equity mutual fund dividend doesn’t remain as lucrative as it was before. Also, if it is only for booking regular profits, then it is wiser to look at the growth option of mutual funds and stay invested for a long term so that you pay 10% tax only once. By doing this you will earn much more than earning through the dividend income,” says Solanki.
6. Other options
Apart from these methods, the other routes available are PPF and unit-linked insurance plans (ULIPs), both of which will generate tax-free returns, but with significant lock-in periods.
However, according to experts, whatever you do, always consult your portfolio manager before taking such decisions.