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The recent budget brought the long term capital gains (LTCG) on equity funds under tax bracket. It calls for a change in the strategy which you were using to deal with the redemption of equity fund units.

This article covers the following:

  1. What is Long Term Capital Gain (LTCG) tax on Equity Funds?
  2. How are Equity Funds taxed?
  3. How to manage LTCG tax on Equity Funds?
  4. How to Invest in Equities?

1. What is Long Term Capital Gain (LTCG) tax on Equity Funds?

When you redeem units of equity mutual funds, you make capital gains which attract tax. The rate at which the gains will be taxed is based on the holding period. It refers to the tenure for which you remain invested in the equity fund. If you sell the units of equity funds after 1 year from the date of allotment, such a holding period would be termed as long term. The gains, thus, made on sale of units which were held for more than one year are called long term capital gains (LTCG). Conversely, the gains made on sale of units of equity fund within 1 year from the date of allotment are known as short term capital gains (STCG).

Previously, the long term capital gains (LTCG) made on sale of equity fund units were exempt from tax. However, in the recent union budget, the LTCG on equity funds have been brought under tax umbrella. This is making the investors find innovative ways to tackle this modification. Instead of worrying about the problem, you can easily manage the LTCG on equity funds via simple tricks.

2. How are Equity Funds taxed?

The recent budget changed the manner in which LTCG on equity funds would be taxed. The following modifications were introduced:

  • Beginning from 1 April 2018, the long-term capital gains in excess of Rs 1 lakh on sale of units of equity funds are taxable at the rate of 10% without the benefit of indexation.
  • All the existing investors will get an exemption on the amount of capital gains made up to 31 Jan 2018. The amount of capital gains which you make after this cut-off date will attract tax liability.

You can compute long-term capital gains (LTCG) by subtracting the cost of acquisition from the sale price of equity fund units. Let us understand the taxation of LTCG of equity funds with the help of an example.

Suppose you purchased units of equity funds for Rs. 120 on 1st October 2017 and sold them on 29 November 2018 at Rs 140. The Net Asset Value (NAV) of the Stock was Rs. 130 as on 31st January 2018. Out of the capital gains of Rs. 20 (i.e 140-120), Rs. 10 (i.e 130-120) is not taxable. The balance of Rs. 10 is taxable as long term capital gains at the rate of 10% without the benefit of indexation, assuming your total gains are in excess of Rs 1lakh.

3. How to manage LTCG tax on Equity Funds?

The introduction of tax on long term capital gains (LTCG) on equity funds need not deter you from taking advantage of the stock markets. You can still build wealth in a stress free manner. Depending on the manner in which you do mutual fund investment, you can easily reduce the effect of the LTCG tax on your returns considerably.

These tips will help you to face the challenge in a streamlined way:

  • Ensure complete understanding of the equity fund scheme before making an investment decision. This will prevent you from sticking to wrong funds so that there are no unplanned exits which attract tax liability. Analyse the fund both on qualitative and quantitative criteria. Just in case you find it difficult to make the right choice, consult a professional adviser to reduce your probability of incurring losses.
  • Avoid frequent buying and selling of units of the equity fund. Investing in stock markets should be looked upon as a long-term investment. Select those funds which have been in the said domain from a long period say at least 5 years. This is to make sure that the funds have faced the ups and downs of the market resiliently.
  • You should keep in mind that the upper limit of exemption of long term capital gains is Rs.1 lakh annually. Thus, try to make best use of this upper limit effectively by selling of units of mutual funds which are not meeting your expectations.
  • Invest in equity funds from overall financial planning point of view. Your entry and exit needs to be timed as per your investment horizon and personal goals.
  • Under ordinary conditions, over the long term equities have given better inflation-adjusted performance. Moreover, owing to higher after-tax returns, over the long-term equity funds have perform better than debt funds.

4. How to invest in Equity Funds?

Many a times investing in equity becomes complex. In case you don’t possess enough financial knowledge and are finding difficult it too difficult to understand, then just go for ClearTax Invest. Here, instead of directly investing in equities, you can try investing in Equity Funds. You can choose hand-picked equity funds in a hassle free and paperless manner.

Using the following steps, you can start your investment journey:

Step 1: Sign in at cleartax.in
Step 2: Enter your personal details regarding the amount of investment and period of investment
Step 3: Get your e-KYC done in less than 5 minutes
Step 4: Invest in your favourite debt fund from amongst the hand-picked mutual funds

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