As LTCG tax on equities kicks in after March 31st 2018, top fund managers and experts alike say that selling off holdings to minimise tax expense is not the best strategy. The fact that Finance Minister Arun Jaitley has grandfathered all gains made up to January 31st, and the ongoing stock market correction make this alternative all the more unappealing. In an interview to FE Online, Alok Singh of BOI AXA Mutual Fund says that post grandfathering and recent correction there is no sense in booking capital gains unless one want to completely exit the equity market. So what should the investors do? “Where ever the stock prices are higher than 31st Jan 2018 and if the cumulative LTCG is more than Rs 1 lakh then investors could think of booking profits,” Ajay Bodke, PMS Head at Prabhudas Lilladher tells FE Online. We decode what investors should do under different circumstances.
Long term capital gains exceeding Rs 1 lakh will be taxed at the rate of 10% effective from April 1, 2018, without allowing the benefit of any indexation. All gains up to 31st January, 2018 will be grandfathered.
Strategy 1: Sell shares at slightly below Jan 31st 2018 highest price
As the gains made till January 31st are fully grandfathered, experts point out that investors may sell the shares (after holding it for a period of more than 1 year to make it long-term) 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 can make a profit even beyond Rs 1 lakh and continue to pay nil tax. We take a closer look at this scenario.
In case the investor purchases a single share of ABC company on 1st of January, 2016 at Rs 100, and the highest price traded on 31st January 2018 is Rs 200. Further, if the shares are sold on 1st of April, 2018 at Rs 150. Even though the investor actually made a gain of Rs 50, the tax will come out to zero, as gains made the shares are sold at a price less than January 31st’s highest traded price.
Strategy 2: Make complete use of Rs 1 lakh exemption limit
Investors can also look to make use of the Rs 1 lakh exemption limit every year, and book regular profits of just below Rs 1 lakh every year. Sanjiv Bajaj, vice-chairman & managing director, Bajaj Capital says that investors should book profits regularly and this would take some understanding and work. “Since Rs 1 lakh of gains are tax-free, at the end of every year, you could sell investments that would generate that much returns and immediately buy them again,” the expert wrote in an recent article with FE Online.
Strategy 3: For mutual fund investors
Alok Singh of BOI AXA mutual fund says that most of the NAVs of mutual funds are lower than their mark on January 31st, and its unlikely that investors will incur any LTCG so far. However in case there is long-term capital gains of more than Rs 1 lakh in mutual fund investments, the investors should keep these trade-offs in mind.
- Many mutual funds come with lock-in periods and exit load for certain number of days. Hence, it is important for investors to consider the exit load and the lock-in before redeeming. “The investors may end up with a higher exit load, and unnecessarily increase their lock-in period (if they buy the fund again) if they think only about minimising tax inflows,” Alok Singh said.
- For SIP investments, it will become all the more difficult for investors to track every investment to check whether the LTCG exceeds Rs 1 lakh. “It is near impossible to do that kind of bifurcation,” says Alok Singh.
Even as you try to minimise your tax outflow, top fund managers advise investors to focus on the long-term, and don’t take decisions solely based on tax considerations. “Taxes should not be the reason why you invest. You invest to make money, over the short or long term,” Deepak Shenoy Founder, Capitalmind told FE Online. On similar lines, Ajay Bodke said, “We don’t think the retail investors need to worry, as equity remains the only asset class giving inflation beating returns, and paying 10% tax appears to be fair.”