Strategies to Save LTCG on Mutual Funds
With indices near highs, I wish this year your portfolio returns are more than the benchmark returns. The quantum of liquidity from the central bank has helped for V-shape recovery in indices. Though most of the sectors are trading at premium of their 10 year average PE, we believe ‘stay invested and cut the noise’ for long term growth of your wealth.
|
1 year Forward P/E Sector Valuations( as on 31st March 2021) |
Current |
10y Average |
Premium(discount) |
|
Cement |
34.07 |
22.06 |
54% |
|
Consumer Discretionary |
63.00 |
42.85 |
47% |
|
Tech |
25.48 |
17.78 |
43% |
|
Automobiles |
21.97 |
15.88 |
38% |
|
Energy |
14.76 |
11.06 |
33% |
|
Consumers |
37.50 |
31.91 |
18% |
|
Industrials |
24.52 |
20.91 |
17% |
|
Pharma |
24.74 |
22.24 |
11% |
|
Metals |
9.46 |
10.24 |
-8% |
|
Utilities |
8.07 |
10.97 |
-26% |
But where there are returns, there are taxes.
It is equally important for you to save tax on your returns as long term capital gains (holding more than 1year) are now taxed at 10 per cent. There is no tax up to Rs 1 lakh LTCG per annum. This gain can’t be aggregated or carried forward in the upcoming years. You need to book the gains on a periodic basis, so it does not lapse for that particular year.
While you invest wisely, be wiser on the redemption process. One of the strategies which you can follow for SIP is to book profits when LTCG crosses Rs 1 lakh.
Let's say if you invest Rs 5,000 in SIP, invested for 10 years, you will have a capital of Rs 6 lakh over 10 years, which grows to Rs 11.5 lakh at 12 per cent return. So the gains are Rs 5.5 lakh and you have to pay 10 per cent tax here which is around Rs 55,000. So the exemption you had per year of per lac is lapsed for 10 years, which you did not utilise.
For better understanding let’s check the below table for Rs 5,000 per month SIP for four and six years scenario.
|
SIP of Rs 5000 per month |
Tenure 4 years |
Tenure 6 years |
|
Principal |
Rs 2.4lakh |
Rs 3.6lakh |
|
Maturity @ 12% CAGR growth |
Rs 3.06lakh |
Rs 5.23lakh |
|
Gains |
Rs 66,000 |
Rs 1.63lakh |
|
LTCG |
Zero |
6,000 (first 1lakh exempted) |
Whenever your total component of return crosses 1 lakh, you have to redeem all your units from SIP, book profits and reinvest into the same SIP. So happy investing!!
The author is Head-Distribution at Anand Rathi Share and Stock Brokers
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.