How to Avoid LTCG (Long Term Capital Gain) Tax?

03 October 2023
4 min read
How to Avoid LTCG (Long Term Capital Gain) Tax?
whatsapp
facebook
twitter
linkedin
telegram
copyToClipboard

In the union budget 2018, Finance Minister introduced a Long-Term Capital Gains Tax of 10% for Capital Gains exceeding ₹ 1 lakh in a year. This tax will be charged without providing the benefit of indexation.

Further, to avoid any retrospective impact, gains up to 31 January 2018 will be grandfathered. This is done by introducing a deeming provision for determining the cost of acquisition. Accordingly, the cost of acquisition would be higher than the actual cost of acquisition and the fair market value.

As a result of the announcement related to the LTCG tax in the budget 2018, the stock markets reacted negatively, with the benchmark Sensex falling more than 800 points as investors’ sentiments dampened and they rushed for selling their holdings. Broader Nifty also was trading lower on the news.

Let's look into various options to avoid paying LTCG tax.

How to Avoid Paying New LTCG Tax?

Everyone wants to know how to avoid paying the re-introduced LTCG tax on equity mutual funds. Here is some suggestion:

  • Systematic Withdrawal Plan (SWP)

A Systematic Withdrawal Plan (SWP) is a plan that allows the investor to give a mandate to the fund to periodically and systematically redeem units and transfer the money from its sale money from a mutual fund scheme to your bank account.

Small investors can avail the benefit of exemption from tax on LTCG from the transfer of listed shares and units by opting for a systematic transfer plan, such that the overall gain in a financial year is below the threshold of ₹ 1 lakh.

  • Selling at Right Time

  • In Case of Gain

By selling the equity mutual fund holdings immediately or systematically before reaching the limit of ₹ 1 lakh in a financial year. You have to closely monitor your investment portfolio and market scenario to decide the right time of selling off mutual fund units.

  • In Case of Loss

If you are incurring a long-term capital loss on selling equity mutual fund units, then it may be better to sell after 31.3.2018 as then you would be able to set them off against any LTCG that you may get, as LTCG will become taxable after this date.

But, it seems there is a consensus among experts and prudent investors that the only way to avoid paying the new LTCG tax is to hold on to your investments.

Why Holding on to Your Investment is Better Option?

Every time you are going to sell your mutual fund holdings, you are going to incur tax. If you are selling it before a year, you would pay short-term capital gains (STCG) tax of 15 per cent.

If you are selling it after a year, you will have to pay a tax of 10 per cent without indexation if the long-term capital gains (LTCG) are above ₹ 1 lakh in a financial year.

That means you should be a bit careful about selling your mutual funds even after a year.

The only way you can do this is to pick mutual funds that are consistent performers during various phases in the market.

Investing in such schemes would help you to avoid churning your portfolio at regular intervals. It is very important to invest in consistently performing mutual fund schemes if you want to sail through the volatile markets.

So, it is suggested that an equity market investor not worry about new LTCG taxes and instead pay them. Just make sure you earn more on your investment by choosing your portfolio diligently and cleverly.

  • Large-cap Funds

Large-cap are big, well-established companies in the equity market. These companies are strong, reputable and trustworthy. Large-cap companies generally are the top 100 companies in a market.

Large-cap funds can be a great investment option for investors with stable return possibilities.

  • Mid-cap Funds

Mid-cap are compact companies of the equity market, falling somewhere between small and large-cap companies, and are 100-250 companies in a market after large-cap companies.

Mid-cap funds can be great investment instruments for investors looking for funds with high return possibilities without the volatility of small-cap funds and index-related returns like those of large-cap funds. 

  • Multi-cap Funds

Multi-cap funds invest in companies of all sizes, unlike other equity funds that usually restrict themselves to a market cap or sector.

Because of the flexibility of investing in all types of companies irrespective of size, the fund manager can generate better risk-adjusted of companies irrespective of size, and the fund manager can generate better risk-adjusted returns.

  • Sector Funds

Sector Funds are essentially mutual funds that invest in the stocks of companies that operate in a particular sector or industry. These funds are ideal as an investment destination if some sectors are expected to outperform others.

If you have good knowledge of a certain sector or industry, you can opt to invest in a sector fund of that industry.

Conclusion

Long-term capital gain tax is one of the taxes paid by the people who sell their assets after holding them for 2 or more years in India.

If you are someone who has to pay too much tax every year, you should know about LTCG and how to avoid it effectively.

But remember, long-term capital gains tax is a tax levied on the profit made on the sale of long-term assets, i.e. those assets which you had held for more than 12 months. It is quite evident with such a name that this tax is aimed at encouraging investors to invest in a long-term perspective as opposed to short-term trading.

Happy Investing!

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Groww Invest Tech Pvt. Ltd. (Formerly known as Nextbillion Technology Pvt. Ltd) Ltd. do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
Do you like this edition?
LEAVE A FEEDBACK
ⓒ 2016-2024 Groww. All rights reserved, Built with in India
MOST POPULAR ON GROWWVERSION - 4.8.6
STOCK MARKET INDICES:  S&P BSE SENSEX |  S&P BSE 100 |  NIFTY 100 |  NIFTY 50 |  NIFTY MIDCAP 100 |  NIFTY BANK |  NIFTY NEXT 50
MUTUAL FUNDS COMPANIES:  GROWWMF |  SBI |  AXIS |  HDFC |  UTI |  NIPPON INDIA |  ICICI PRUDENTIAL |  TATA |  KOTAK |  DSP |  CANARA ROBECO |  SUNDARAM |  MIRAE ASSET |  IDFC |  FRANKLIN TEMPLETON |  PPFAS |  MOTILAL OSWAL |  INVESCO |  EDELWEISS |  ADITYA BIRLA SUN LIFE |  LIC |  HSBC |  NAVI |  QUANTUM |  UNION |  ITI |  MAHINDRA MANULIFE |  360 ONE |  BOI |  TAURUS |  JM FINANCIAL |  PGIM |  SHRIRAM |  BARODA BNP PARIBAS |  QUANT |  WHITEOAK CAPITAL |  TRUST |  SAMCO |  NJ