Hey Guys!!
How are you all?
Hope you guys are doing great!!
As an investor if someone give me tip to save some tax on my hard earn money, I would love to listen his strategy for hours. But if I tell you that I have a strategy to save tax on your Equity or Equity Mutual fund investment then, in that case, you should read at least short and small trick as mention below.
As every investor knows that you will have to pay 15% of tax on your capital gains if you sell equity/equity MF within 12 months and the tax is known as short-term capital gains (STCG) tax.
In other scenario, if you hold your equity/equity MF more than 12 months, you will have to pay 10% of tax on your capital gains exceeding Rs. 1 lakh threshold, known as Long-term capital gains (LTCG) tax.
Tax harvesting on STCG
1. Use short-term loss to offset STCG TAX
For Example, in any financial year, if you have short term lose 25000 Rs. on one stocks and you have earned 35000 Rs on other kind stocks or MF units by selling it (Same year). In this kind of case, you need to pay 15% STCG tax on 10,000 Rs (35,000 - 25,000 Rs) only which is 1500 Rs. There is no other way to save tax in STCG.
Tax Harvesting on LTCG
1. Keep your LTCG below 1 lakh (Rs)
In case of LTCG, you have to pay 10% of your capital gain if and only if your capital gain is the capital gain is over 1 lakh. There we have loophole, what if we keep/adjust our long term capital gain below 1 lakh and holding more than12 months? In this harvesting strategy, you sell a part of your mutual fund units, of course after 1 year, to book long-term capital gains and then reinvest the entire amount in the same mutual fund.
Let’s take an example to get into your mind thoroughly
Suppose, you have invested 4 lakh in an Equity Mutual fund on 1 Jan 2020, and on 25 Jan 2022, the value of this investment turn out to be 4.8 lakh. At the present, if you redeem this MF, your long term gains is 80,000, and you have to pay nothing as tax because your capital gain is below one lakh- No taxable amount to consider. To be continue, you have to invest 4.8 lakh after redeeming it. This will reset your investment cost to 4.8 lakh along with the date of investment. Now, assume your investment grows to 5.7 lakh after a year. You will again redeem it so that your gains will not be over 1 lakh. By following this three step 1. Invest, 2. Redeem, 3. Re-invest, you can save lot of tax. However, if you invest and redeem but don’t reinvest (Don’t be greedy here at this step), the strategy becomes meaningless.
Basic rule 1. Invest, 2. Redeem, 3. Re-invest
Now think that you didn’t follow above three steps, your long-term gains would have been 1.7 lakh (5.7 lakh - 4 lakh Rs.). In such a scenario, you had to pay 10% tax on the amount that exceeded the limit of 1 Rs lakh. So a taxable amount would have been of 7,0000 Rs. and the tax deducted would be 7000 Rs.
That’s all Guys
Have Fun