What Can Investors Do to Minimise Long Term Capital Gains Tax Impact?

The Union Budget of 2021 retained the Long-Term Capital Gains Tax or LTCG on capital gains (profits garnered from the sale of Equity and Equity Mutual Funds held for over a year). Investors will continue to pay LTCG tax if the proceeds from the sale of Equity and Equity Mutual Funds exceed Rs 1 Lakh, annually. Moreover, with the government abolishing Dividend Distribution Tax (DDT) on such investments, dividend income is now taxable in the hands of the investor. From April1,2021, such income will be added to the total taxable income and taxed according to the respective slab he or she falls in. In addition, dividend payments of Rs.5,000 or more will also be assessed TDS at a flat rate of 10%.

A new Sec. 112A has been introduced to withdraw the exemption u/s 10(38) and to tax LTCG on equity share in a company or a unit of an equity oriented MF or a unit of a business trust @10%, if Securities Transaction Tax (STT) has not been paid on both acquisition and transfer. The requirement of STT being paid at the time of acquisition shall not apply to purchases made before 1.4.2004 when STT was introduced. The new tax is applicable only on amount of capital gain exceeding Rs. 1 Lakh.

This clause meant that all the profits garnered by investors until January 31, 2018 (based on the earlier regime, when there was no LTCG applicable on equity funds) would remain tax-free. The long term capital gains tax becomes applicable to your profits after January 31, 2018. Even so, there is a way you can reduce the impact of LTCG on your investments.

Here are some simple tips to soften the blow of LTCG on your portfolio:

1.    Recalibrate your equity investment plan

Has the introduction of LTCG dampened your enthusiasm to invest in equity funds? Well, it’s time to cheer up. Equities remain the most efficient vehicle to achieve high growth with the lowest tax impact over the long term. If you have a sizeable equity portfolio where the potential long-term returns could reduce by 10%, you may want to increase your SIP investments by 10%, each, to nullify this impact. You can invest in a wide range of mutual fund schemes with a complete control over your investments through HDFC Bank.

2.    Invest in your adult child

If you want to enhance the quantum of your investment, you can take the help of your child if they are above 18 years of age. Under Indian tax laws, the earnings of individuals who have turned 18 are not clubbed along with their parents’ earnings. Thus, if you invest in your child’s name (provided they are already 18) you can avoid LTCG altogether. Besides, your children will also be eligible for the basic exemption of Rs 2.5 Lakh each, until they have an income of their own exceeding this amount. Additionally, if they have invested in an Equity Linked Savings Scheme (ELSS) in their name, they can get additional tax exemption benefits under Section 80C of the Income Tax Act.

3.    Harvest gains each year

If your equity portfolio is sizeable (say Rs 20 Lakh or higher), you are likely to garner profits of Rs 1 Lakh annually. However, if you get into the habit of churning your portfolio to increase the acquisition cost, you can still avoid LTCG tax. Let us understand this with an example.

  • You purchased 1,000 shares of company A at Rs 150 per share in February 2018
  • By March 2019, the share price increases to Rs 200, at which point you sell the shares
  • You make long-term gains of Rs 50,000 in the process
  • If you repurchase the same stocks, the acquisition price is now set at Rs 200, and the acquisition date becomes March 2019
  • If the share price rises to Rs 250, and a year later, i.e. in April 2020, your long-term capital gain will remain Rs 50,000.
  • However, had you not sold and repurchased the shares by March 2019, your long-term capital gains would have amounted to Rs 1,00,000 by April 2020, thus subject to LTCG tax.

However, do bear in mind that by churning your equity portfolio, you incur STT or Securities Transactions Tax of 0.001% in case of Mutual Funds, and 0.1% in case of buying and selling Equity shares directly. However, this amount can be minuscule in case of a significant equity portfolio.

Thus, in conclusion, it is fair to say that despite the reintroduction of LTCG tax, there are ways and means to minimise its impact to keep the returns from your equity portfolio intact. Having said that, each individual has a different portfolio and different financial goals. It is thus prudent to seek advice from a financial advisor before changing your investment strategy.

Under Section 80C of the Income Tax Act, 1961 you can save tax by investing in Tax saving Fixed Deposit. Calculate using FD calculator.

* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.