While equity mutual funds remain to be one of the best ways to earn higher returns, lack of tax planning may consume your gains. Returns on equity mutual funds are no longer excused from tax as they were in past. "Long-term capital gain is chargeable to tax in the year in which mutual funds are marketed by the investor. Long-term capital gain on sale of an equity-oriented mutual fund is liable to tax at 10 percent from April 1, 2018, before that it was released from tax in the hands of the investor. However, long-term capital gain up to Rs 1 lakh is excluded from tax," says Kapil Rana, Founder & Chairman, HostBooks.
Every penny of the decrease in tax outflow boosts your return. If your expected long-term capital gain is underneath Rs 1 lakh, your gains will be completely exempted and hence you would not require to go for any additional effort to save taxes. However, if your gain through equity MF is more than Rs 1 lakh then depending upon the quantum of profit you need to prepare your investment and withdrawals in tax-efficient ways.
Set off the gains against capital losses
The very first point which you can use to offset your gain from equity MF is any capital loss caught. "Long-term capital loss from equity MF can be set off only against long-term capital profit from equity MFs. However, a short-term capital loss can be set off upon long-term or short-term capital gains both," says Rana of HostBooks.
Short term capital loss on equities can be utilized against both short-term and long-term profits on any capital asset. This will assist you to save tax on other gains. When it gets to LTCG, once you exhaust the offset limit of capital loss you can utilize the Rs 1 lakh release. This will enhance your overall ability to focus on the higher capital gain without incurring any tax.
In case you are not able to change your capital losses in the same year you can carry it forward for the following eight years and set it off whenever you make profits. However, to do this you have to file your ITR each year and show the needs even when you do not have any income to show.
Split withdrawal with profits between Rs 1 and Rs 2 lakh
If your total long-term capital gain has reached above Rs 1 lakh but is still below Rs 2 lakh, you may avoid tax by switching to two parts. "One can save taxes by splitting one's sale event in two financial years if market conditions permit him to do so," says CA Geetanshu Bhalla, Founder, The Virtual Compliance. For example, you can withdraw your investment to utilize excused withdrawal up to Rs 1 lakh profit now and the rest of it when the new financial year starts from April 1.
If the profits are much more than Rs 2 lakh and you have a long-term horizon, it will not be possible to wait for more than one year just to make withdrawals. In such a situation you may churn your portfolio. "One should always try to concentrate on churning the portfolio in such a way that one can claim exemption of Rs 1 lakh.
Bhalla matches with this strategy and suggests that income tax provision does not restrain anyone to do so. "A taxpayer can do it presented his risk-bearing capacity allows him to do so."
For greater profits buy a residential property
In the case of capital profits over Rs 15-20 lakh, no amount of churning can help in saving a big part of the capital gains tax. In such a position you have the option of buying a residential property to lessen the capital gain tax on your mutual fund investment.
"One can buy a residential property to keep the LTCG tax on equity MFs provided one does not have more than one residential house on the date of transfer of MFs and will not purchase or build any residential property other than the said residential property within one year or three years respectively from the time of transfer of MFs. Furthermore, income from said new residential property shall not be responsible to tax under the head House property," says Bhalla of The Virtual Compliance.
Also note that in series to save the total tax liability, not only do you have to invest the capital gains in the private property, but also the entire sales proceed.
"If the value of the new house is not less than the value of the asset sold, the full amount of capital gain is excluded from income tax. But if a part of the capital gain is bought, then only that part will be exempted proportionately (i.e. cost of the new house * capital profit amount /Net consideration) and the balance value will be taxable at 20 percent," says Rana of HostBooks.