In the ever-evolving world of mutual funds, investors often grapple with a query – when is the perfect time to sell? But more than worrying about the perfect time to sell, investors should rather focus on maximising tax savings and investing in the right funds or schemes for the long term to let the power of compounding work.
As markets keep fluctuating and the investment goals of investors change with time, it also becomes important to follow a sound strategy for making informed decisions to safeguard returns and minimize tax burdens.
When it involves handling your funding portfolio, maximizing returns and minimizing tax liabilities go hand in hand. The following are four tips savvy investors can apply to achieve financial growth while ensuring maximum tax saving
Capitalize on Long-Term Capital Gains
You should always try to lower your tax invoice by taking advantage of long-term capital gains tax. If the holding period of an equity mutual fund is up to or less than 1 year, then it is taxed as short-term capital gains at 15% flat rate.
However, if the holding period of the equity fund is more than 1 year, the gains from sale of equity fund units will result in long-term capital gains (LTCG). LTCG up to Rs 1 lakh are exempt from tax. Any gains over Rs 1 lakh per annum are taxable at the rate of 10%, with no indexation benefit (read more details here).
Tax Loss Harvesting
You can also apply the tax loss harvesting process to reduce tax liability. This process involves offsetting capital gains made on equity investments against the capital loss to pay lesser tax.
“Tax loss harvesting involves promoting investments that have declined in price to offset gains realized from different assets. By strategically figuring out losses, you could reduce your typical taxable income,” says CA Manish Mishra, Virtual CFO & Personal Finance Advisor.
Opt for Tax-Efficient Investments
It is also important to choose tax-efficient investments. According to Mishta, choosing tax-efficient investments can assist in reducing the effect of taxes on your portfolio.
“Look for assets that have a low turnover price, as frequent buying for and selling within a fund can generate taxable events. By being aware of the tax implications of your fund selections, you could effectively reduce your tax bill,” says Mishra.
Contribute to Tax-Saving Funds/Schemes
Investors can claim deductions up to Rs 1.5 lakh per year on the amount invested in tax-saving schemes such as ELSS funds. It is also important to maximise contributions to tax-advantaged accounts such as NPS, which gives market-linked returns like mutual funds and is considered one of the best investment options for retirement. NPS also has several tax advantages.
“Staying ahead of the curve in the mutual fund market requires not only throughout knowledge of investments but additionally a keen eye for tax optimization. As the investment landscape continues to adapt, harnessing the strength of tax efficiency will become a crucial tool in pursuing long-term financial goals,” says Mishra.
