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As the end of the financial year approaches, it is probable that you are thinking of tax saving options on the investments you have made over a period of time. The most common investments being, equity shares, mutual funds, etc. which provide a higher rate of return compared to the traditional fixed deposits investments. With the amendments on taxability of shares/stocks, mutual funds etc brought about in Budget 2018, which seek to impose taxes on Long Term Capital Gains (LTCG) in excess of Rs 1 Lakh at the rate of 10%, on sale or redemption as the case may be, after 31 March 2018, a little amount strategic planning will still help you save your taxes.
For those of you holding shares, equity mutual funds for a period of more than 1 year as of today and do not intend holding it for a longer duration and propose selling them in the near future, please do it right away. Selling the shares or redeeming the units on or before 31 March 2018, will help you save on your taxes as the LTCG made until 31 March 2018 are considered exempt. Also to note that you may have to act on this,on or before 28 March 2018 given that 29th, 30th and 31st are holidays and you cannot afford to push the sale till 31 March as doing so would push your date of transfer to the next financial year and you may end up paying taxes on your LTCG.
This is for those of you who do not intend selling your shares in the near future but want to ensure minimal tax outgo whenever you sell them. Is this possible? Yes it is. Let us understand this with the help of the following example: You have invested in shares worth Rs. 2 Lakhs on 1st July 2016 (these shares will become Long Term Capital Assets 1st July 2017). You want to hold these shares for a longer period of time but also want to save on the taxes you pay. Post these shares becoming, long term assets, whenever you sell them you will be liable to tax at 10% on the LTCG exceeding Rs. 1 Lakh if you sell your shares post 31 March 2018. However, here LTCG made up till 31 January 2018 will not be affected. Only the gains made after that date will be taxed. Here it is pertinent to note, that if the Fair Market Value (FMV) of the investments as on 31st January 2018 is greater than the actual cost of the investment, the FMV on 31st January 2018 will be considered for computing capital gains.
Step 1: Assuming the value of the shares on 26th March 2018 is Rs. 4.90 Lakhs and FMV on 31st January 2018 is Rs. 4 Lakhs Sell these shares before 27th March, 2018 which would result in LTCG of Rs. 90,000, which is exempt for tax. Subsequently on 28th March, 2018 reinvest in the same shares for Rs. 4.90Lakhs
Step 2: This process of sale and reinvestment can be resorted to year on year to ensure that you are :
This table is a comparison of how you can save on your tax outgo by resorting to sale and reinvesting year on year as against retaining your shares/ mutual funds for a longer period and sell them after the intended holding period.
|Particulars||Selling and reinvesting||Continuous Holding|
|Sell - 26.03.2018 Reinvest on 27.03.2018||Sell - 26.03.2019 Reinvest on 27.03.2019||Sell - 26.03.2020 Reinvest on 27.03.2020||Sale in FY 2019-20|
|Cost of Acquisition||4,00,000 (FMV as on 31st January 2018)||4,90,000||6,50,000||4,00,000|
|Long Term Capital Gain (LTCG)||90,000||1,60,000||2,00,000||4,50,000|
|FY 2017-18||No Tax||-||-||-|
|FY 2018-19||-||60,000*10%= 6,000 (Upto Rs. 1L is exempt from tax)||-||-|
|FY 2019-2020||-||-||1,00,000*10%= 10,000 (Upto Rs. 1L is exempt from tax)||3,50,000*10%= 35,000 (Upto Rs. 1L is exempt from tax)|
|Total Tax Liability||16,000||35,000|
The net tax which can be saved through this tax planning is Rs. 19,000 Note: Sale and reinvestment year on year for 3 years will result in additional outgo towards brokerage, STT etc. These have not been considered in the above example If you have a diversified portfolio we can advise you on tax saving options for your long term capital gains.