How Can You Reduce Your LTCG Tax Burden?

Sep 04, 2018 | 4 months ago | Read Time: 3 minutes | By iKnowledge Team

LTCG

The 2018 Budget has imposed a Long-Term Capital Gains Tax (LTCG) on the sale of equity shares as well as mutual funds. As per this new rule, gains made on the sale of shares in excess of Rs. 1 lakh will be subject to tax at the rate of 10% from financial year 2018-19 onwards. This move by the finance minister has received a fair bit of criticism by investors who believe that it could erode returns on their equity portfolio. Here’s where efficient tax planning can help you reduce your liability to some extent. Let’s look at a few ways in which you can legitimately circumvent LTCG tax:

Invest in the name of adult child

 According to the tax rules, after you turn 18, you are considered to be a separate individual. You will no longer be clubbed with your parents and their income. Thus, when you invest in your adult child’s name you can distribute your gains and not attract tax. This strategy will not put him in the LTCG tax bracket for a few years and you would end up saving a lot. Your child will not only be eligible for a tax exemption under the capital gains tax, but also get an additional deduction under Section 80C.

Churn your portfolio and regularly harvest the gains

If you have a sizeable portfolio, with obvious taxable gains, you can keep the cost of acquisition high by rotating it and harvest capital gains every year to ensure that gains do not exceed the exemption threshold. What this strategy entails is – you sell your stocks to book long term capital gains and then buy back the same shares. Doing this resets the date and cost of acquisition of shares and keeps your profit outside the tax net. For instance: If you buy 1000 shares of a company for Rs. 200 each, in January 2018, the price of which increased to Rs. 260, in January 2019, your profit would be Rs. 60,000. Now if you sell these stocks and buy them back, your new date and cost of acquisition would be January 2019 and Rs. 260 respectively. After 12 months, if the same stock price increased to say 330 your gain would be (330-260) =70 x1,000 = Rs.70,000 which is still within the LTCG tax – exemption limit of Rs.1,00,000.

Conversely, if you hadn’t sold these shares at Rs. 260 your total gain would have been (330-200) = 130×1000 = Rs. 1,30,000 of which Rs. 30,000 would be taxable under LTCG.

Keep in mind that while churning your portfolio can help you avoid the tax bracket, it also implies higher brokerage charges. Hence, you should opt for a low-cost brokerage firm which will help you minimize your payments.

Invest in ULIPs

ULIPs are a combination of both insurance and investment. They give you the option of investing in both equity and debt depending on your risk appetite.  What’s better is that the tax burden is eliminated, as section 10D of the Income Tax Act 1961 exempts income from insurance products. After the announcement of LTCG tax on equity investments, Unit-Linked Insurance Plans (ULIPs) have become an attractive investment option because Income from ULIPs is not taxable. Equities, in spite of yielding high returns are not as appealing from LTCG tax-saving perspective as the returns are diminished by the LTCG tax which is levied at 10% on such returns. Investing in ULIP is a better tax saving strategy due to their tax-free nature.

As an investor, the Long-Term Capital Gains Tax can be a daunting feat to overcome. However, with the help of these strategies you can significantly alleviate your LTCG tax liability and preserve your investment returns.

Advt. no.: IA/Aug 2018/4341


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