After the re-introduction of LTCG tax, equity investors should pay a tax of 10% on long term capital gains of over Rs 1 lakh in a financial year. Equity investments held over a year qualify for LTCG tax.
“If you have made long-term capital gains, it is a good time to utilise the tax break. A very important part of investing for a long term is saving on as much taxes as you can. This helps your money to grow,” says Babu Krishnamurthy, Chief Sherpa, Finsehrpa Investment Services, a Chennai-based financial advisory firm. “Saving 10 per cent tax on every Rs 1 lakh is a big amount. This can be used to enhance the growth of your money,” advises Krishnamurthy.
However, some mutual fund investors, especially committed to long-term investments, are questioning the efficacy of the strategy. These investors believe constant selling and buying would ruin the much-needed discipline. Some of them also believe that the exercise is futile as investors would pay taxes at the time of final redemption to meet the financial goal.
Mutual fund advisors are busy reassuring these investors than the whole exercise is aimed at saving taxes and reinvesting the entire money as soon as the new financial year begins. The new financial year starts on April 1 and it ends on March 31.
“Investors need to make sure that they invest the entire amount back in their schemes. There are many investors who wait for months to invest the money again or invest only a portion of the gains. This is dangerous for the growth of your money. So, if you have the discipline to re-invest it immediately, only then you should redeem your investments,” says Ashish Modani, Founder, SLA Financial Solutions, a Jaipur-based wealth management firm.
However, the strategy is not for every equity mutual fund investor, say mutual fund advisors, who believe that investors with a huge corpus shouldn’t bother to redeem their gains in their quest to save taxes within the Rs 1 lakh threshold. Similarly, if you have very small gains in your equity mutual funds, you should stay away from the hassle. That means, mutual fund advisors are primarily pitching the strategy to investors with moderate investments. Ashish Modani believes that if you have at least Rs 30,000, you should take the pain of redeeming and re-investing.