Ways to manage your tax on equity funds

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We have often heard, “There is no tax in dreaming,” but what about when it comes to your financial investments? By viewing the financial products through the lens of reality, we are reminded that any investment products do not come without tax attached to it. Be it fixed deposits or mutual funds; you cannot accept the reality by ignoring it.

However, managing tax should not be a burden and instead be a way of careful planning and discipline. That said, investors,today hold many different kinds of investment, especially when it comes to mutual funds.

Mutual funds also come with a tax advantage, which is why investors must understand the tax implications of income gained from investing in it. Capital gains are the profits earned by investors on their mutual fund investments when they sell the mutual fund units.

Capital gains can be classified as either Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG). This is dependent on the ‘Period of Holding’ of the mutual fund units, which is measured from the date of purchase to the date of sale. The tax on these profits is referred to as ‘Capital Gains Tax.’

The selling of equity mutual fund units is classified under LTCG or STCG, depending on the holding duration of the units. If units of listed equity mutual funds are held for less than 12 months, the short-term capital gains would be taxed at the rate of 15%.

If the units of listed equities mutual funds are held for at least 12 months or more, the gains generated are long-term capital gains. Long-term capital gains are taxed at 10%, provided such gains exceed the threshold limit of Rs 1 lakh in a financial year. The LTCG derived up to Rs 1 lakh enjoy tax exemption.

Long-term capital gains (LTCG) taxes on equity-oriented funds should not prevent you from investing in equity funds. You can still accumulate wealth without going through stress. Depending on how you invest in equity mutual funds, you can easily mitigate the LTCG tax’s impact on your returns.

Let’s take a look at how you can manage the tax on equity funds more effectively:

– Before making an investment decision, ensure that you have a thorough understanding of the equity fund strategy. This will prevent you from remaining invested in the wrong equity funds, avoiding unplanned withdrawals that result in tax liability. Conduct a qualitative and quantitative analysis of the fund. If you’re having difficulty making the appropriate choice, consult a professional financial consultant to limit your risk of incurring losses.

-Avoid frequent purchases and sales of equity fund units. Investing in equities mutual funds should be viewed as a long-term endeavour.

– Select just those equity funds with a proven track record of consistent performance over an extended period of time. This ensures that the equity funds have weathered the market’s ups and downs with resiliency.

– It would be prudent to keep in mind that the yearly exemption ceiling for long-term capital gains is Rs 1 lakh. Make the most efficient use of this upper limit by selling any stock fund units that do not fulfil your objectives.

-Invest in equity funds as part of an overall financial plan. Your entry and exit points must be aligned with your investment horizon and personal objectives.

– Under normal circumstances, equities investments have historically outperformed debt in terms of inflation-adjusted returns. Additionally, due to their higher after-tax returns, equities funds have historically outperformed debt funds.