Should you pay 10% tax on your gains? Well, as per the new LTCG (long term capital gains) tax law, a 10% charge will be imposed, starting from Financial Year 2018-19, on equity capital gains of over ₹1 lakh if the asset was held for more than a year.
The taxing of LTCG on equities was stopped in 2004-05. This year, it’s been brought back by the government – probably with the intention of generating more revenue from the investors who earned big in equity and mutual funds in the past few years.
Suppose you invested only Rs 3 lakh in equity funds. Since your portfolio is not very big, your profits are unlikely to surpass the tax-free limit of Rs 1 lakh for at least a few years.
On the other hand, if you and your spouse are investing in an equity fund portfolio of around Rs 20 lakh and SIPs of Rs 30,000 per month, then you could attract tax when you withdraw them in a few years. In this case, one way to reduce tax-liability is to start investing in the name of your child. Gifting money to a child above 18 and then investing it is a perfectly legal plan.
Tax rules state that after someone turns 18, he/she is then a separate individual, and his/her earnings will not be clubbed with the parent’s income. Thus, if you invest in your child’s name, he/she will not only be eligible for the Rs 1 lakh exemption for capital gains but also for the Rs 2.5 lakh basic tax-slab exemption and the Rs 1.5 lakh deduction under Section 80C.
The most popular method to Avoid LTCG tax
Another way to lighten your tax-burden is to keep selling your stocks and buying them back again. This way you can harvest your gains on a regular basis. Even if you intend to hold a stock for a long time, it makes sense to churn the portfolio.
Buying the same stocks again means that you reset the acquisition date and can book short-term or long-term losses if the stock prices fall from those levels. Suppose you bought 1,000 shares of a company at Rs 200 apiece in January 2018 and the stock rose to Rs 240 by February 2019. You would have made long-term gains of Rs 40,000. If you sell all the shares in February 2019 and buy them back, your acquisition price will have changed to Rs 240 and the date of acquisition will become March 2019. Now if the stock rose to Rs 320 in another 12 months, your gain will only be Rs 80,000 and still tax-free because it is below the Rs 1 lakh limit.
However, if you had not sold off at Rs 240, your acquisition price would have been Rs 200 and your total capital gain would have been Rs 1.2 lakh. This means that Rs 20,000 would have been subject to LTCG tax.