2 simple ways to reduce the impact of the new long-term capital gains tax

Yes, you’ve heard it right! The most dreaded fear of the Indian investors has finally become a reality staring them in their face. In a huge change for equity investors, the government of India, in Union Budget 2018 restored the long-term capital gains tax on equity.

 

 

  • From the said date, investors selling stocks or equity mutual funds held for a long-term horizon will have to pay taxes on the gains that have accrued since market closing as on Jan 31
  • If an investor realizes gains that are more than Rs. 1 lakh in a year, the investor will then have to pay to the government 10.04% of those gains (including cess) as LTCG tax.

This is a massive move from a view point of personal savings and investment for investors. Moreover, the tax that you will pay on LTCG on equity might end up costing you much more than 10%. Although you might pay 10% of your returns to the government as LTCG tax, the fact is that you could actually end up losing around 30-40% or much more of your returns on investment, ‘depending on the way you make your investment’.

Well! If there’s sad news that you might end up losing your money in the form of LTCG tax on equity, there’s good news hidden in the phrase ‘depending on the way you make your investment’. Indeed! You would be surprised how big a difference the way you invest can make in terms of limiting the losses you could incur through LTCG tax on equity. The answer to saving your money on LTCG tax on equity lies in making smart changes to your overall approach to investment.

Following are three smart ways in which you can reduce the massive hidden impact of the long-term capital gains tax mentioned above: Simply do not keep on buying and sell too frequently

Agreed! You need to book profits, but at what cost. Weigh your options now in the wake of the LTCG tax on equity. It is crucial for you to choose more of the all-weather stocks in your portfolio, which would withstand the test of time during your stock holding period in the long run without causing too much damage to your overall portfolio. This way, you will experience slow but enhanced returns while limiting the LTCG tax impact on your portfolio.

Agreed! You need to book profits, but at what cost. Weigh your options now in the wake of the LTCG tax on equity. It is crucial for you to choose more of the all-weather stocks in your portfolio, which would withstand the test of time during your stock holding period in the long run without causing too much damage to your overall portfolio. This way, you will experience slow but enhanced returns while limiting the LTCG tax impact on your portfolio.

Invest in mutual funds instead of buying and selling direct equity

It is important to diversify your investments and look at direct equity investments as well. However, balance is the way of life and it is no different when it comes to the life of your investments as well. Don’t stop investing in direct equity, but pick all-weather stocks as suggested in point 1. Don’t invest in direct stocks from the point of view of booking profits at peaks. This may turn out to be a costly strategy now. Given the LTCG tax development, it would be wiser to invest your savings in mutual funds rather than indulging in buying and selling equity directly. Please note that an investor in mutual funds can get the same returns as in direct equity investments, but needs they need to buy and sell their investment much less frequently. The stock trading happens at the hands of the fund manager inside your fund’s portfolio. As long as you hold on to your mutual fund investments, there will be is no taxable event involved here.

Happy Investing!

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