Latest Expert Exchange Queries

GST Demo Service software link: https://ims.go2customer.com
Username: demouser Password: demopass
Get your inventory and invoicing software GST Ready from Binarysoft info@binarysoft.com
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
 
 
 
 
Popular Search: VAT Audit :: due date for vat payment :: cpt :: empanelment :: ACCOUNTING STANDARD :: ACCOUNTING STANDARDS :: TAX RATES - GOODS TAXABLE @ 4% :: VAT RATES :: TDS :: form 3cd :: articles on VAT and GST in India :: Central Excise rule to resale the machines to a new company :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: list of goods taxed at 4% :: ARTICLES ON INPUT TAX CREDIT IN VAT
 
 
News Headlines »
 Quarterly GST returns filing may be extended to all companies
 How many times one can revise tax returns?
 Income tax exemption for FY19
 How will the new provisions really work?
 How to save income tax? Best tips for young earners
 Forgot to verify your income tax return? Here's help
 Notification of Government e-Marketplace (GeM) under section 138 of the Income-tax Act
 Income tax returns can be filed even if you missed deadline
 What is the difference between a tax return and a tax refund?
 Improving tax compliance in India
 How to invest in the new LTCG tax regime
 5 Tips to help you save tax
 Why to file income tax return?
  Income Tax For Individuals – Assessment Year 2019–20
 

How to invest in the new LTCG tax regime
February, 12th 2018

The proposal to tax long-term capital gains from equity funds has miffed investors. Their returns will now be lower than anticipated.

This could change the way people prefer to invest their savings. For instance, equity-linked savings schemes (ELSS) could lose the tax-free status that made them among the favoured options for investors looking to save tax.

Also, given that equity funds will not be allowed indexation benefit, the tax disparity between equity and debt schemes has narrowed, making debt funds and FMPs more attractive now.

ELSS can still yield higher post-tax returns
Even after 10% tax, ELSS funds retain high wealth generating ability.

Data as on 6 feb 2018 Source: Return data from Value Research

Don't shun ELSS
The tax on LTCG will make tax-saving options such as the Public Provident Fund (PPF) and Ulips more tax-efficient than ELSS funds. These will continue to be taxfree while the gains from ELSS funds will be taxed at 10%. But experts say investors should not shun ELSS because of the new tax. The different nature of these investing avenues means each has a has a different role to play in an investor's portfolio. Being pure equity based instruments, ELSS funds have the potential to generate higher returns, making them an ideal long-term investment, irrespective of the new tax. Rohit Shah, Founder and CEO, Getting You Rich, asserts, "For aggressive investors, ELSS still remains lucrative as the post-tax return will be greater than PPF and high cost Ulips."

Low cost Ulips, sold online directly by insurance firms, can possibly provide returns comparable with ELSS over the long term. But unlike Ulips, ELSS offer greater flexibility to investors. They don't have to make a multi-year commitment and can shift to another fund if a scheme is underperforming. In case of underperformance in a Ulip, the investor can only switch between funds offered by that Ulip. "ELSS funds have lost some of their sheen but they still remain the best option in the 80C basket for long-term wealth creation," adds Shah. Besides, ELSS still has the shortest lock-in period of three years among all instruments under 80C, points out Amol Joshi, Founder, PlanRupee Investment Services.

Avoid Ulips, insurance policies
After the Budget announced the tax on LTCG, insurance companies have started giving ads highlighting the tax-free returns from insurance policies and Ulips. However, financial planners advise against investing in these plans. "We prefer to recommend investment products which give taxable returns but perform better than products which are tax free but give low returns. Mutual funds remain our first choice, not tax-free insurance policies," says Abhinav Angirish, Managing Director, Abchlor Investment Advisors. In any case, insurance and investments should not be combined in one product. A term plan serves the objective of protection better and mutual funds generate higher returns.

If you want to save tax under Sec 80C, a combination of ELSS and PPF is perhaps the best option. While ELSS generate higher returns, PPF provide a stable foundation with assured income. "Ideally, investors should have a mix of ELSS and PPF, and not use one instead of the other. This fetches the investor three benefits under one basket—asset allocation afforded by mix of equity and debt, safety of a governmentbacked vehicle and pure growth of an equity offering," says Joshi.

Arbitrage for short-term
Equity arbitrage funds, a sub-category that offers 'debt like return and equity like taxation benefits', have also been hit by the new tax. The returns from equity arbitrage funds are comparable with those of short-term and ultra-short term debt funds. Investors, especially HNIs, used to park their short-term funds in these funds to gain from the tax advantage. While debt fund investors were forced to pay a dividend distribution tax of 28% (ie 25% plus 12% surcharge), there was no dividend distribution tax (DDT) here.

Similarly LTCG were tax free here after a year of holding, while debt fund investors paid 20% tax even after holding for three years. Though equity funds will now be subjected to LTCG tax and DDT, experts say the arbitrage funds are still the best option to park short-term funds. "Though the sheen has reduced, equity arbitrage funds continue to generate better post-tax returns than other alternatives," says Ashish Shanker, Head - Investment Advisory, Motilal Oswal Private Wealth Management.

The tax rate is still attractive for equity arbitrage funds. While debt funds investors pay a total DDT of 29.12% after 1 April, it is only 10.4% for equity arbitrage funds. Similarly, the tax advantage is huge for the 1-3 years holding period also. "The tax arbitrage differential will come down, but equity arbitrage funds will still remain a good option for short-term investments," says Raghvendra Nath, MD, Ladderup Wealth Management. Besides, the sudden increase in stock market volatility, triggered by the imposition of the LTCG tax and DDT on equities, is good news for arbitrage funds. The arbitrage opportunity is greater during periods of increased volatility. "Usually, carry costs are low when the market is extremely bullish. Risk premiums will be higher in volatile periods like this," says Nath.

However, the arbitrage opportunity may come down if the correction continues for very long and investor interest in the market wanes. In arbitrage funds, the dividend option makes more sense. The tax rate on shortterm capital gains is 15% while dividends will be taxed at 10%. "Since there is a tax advantage of 5% in the first year, the dividend option is better," says Nath. Arbitrage funds make money by buying and selling in different market simultaneously to corner the price difference. Their risk profile is comparable to that of debt funds. However, these funds can be very volatile in the short term (less than three months). "Since NAVs can fluctuate wildly for short holding periods, the ideal investment horizon for this segment is 6-12 months," says Shanker.

Time to buy debt funds
Retail investors in mutual funds focus mostly on equity schemes, while debt funds are generally ignored. One reason for this is the tax treatment of returns. Short-term gains from debt funds are added to your income and taxed at normal rates and longterm gains are taxed at 20% after indexation. Though equity funds still retain the upper hand (the minimum holding period for long-term gains is one year compared with three years for debt years for debt schemes), the 10% tax on long-term gains from equity funds has reduced the tax disparity.

How debt funds gain from indexation
Adjusting for infl ation during holding period lowers the effective capital gains and the tax outgo

Gains from debt funds are eligible for indexation benefit which makes these schemes fairly tax-efficient. Indexation can significantly reduce the effective capital gains, reducing the tax liability for the investor. "At times, the investor may not even incur any tax liability on the bond fund gains after indexation," says Kunal Bajaj, CEO, Clearfunds. Experts say investors should integrate bond funds in their portfolio and use them in conjunction with equity funds for goal planning. Bajaj assert .

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2018 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Our Portfolio

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions