Keep more of your money with these smart strategies to reduce your tax liability
09-Oct-2023 •Shubham Jain
The reintroduction of long-term capital gains tax of 10 per cent on stocks and equity funds prompted investors to look for ways to reduce their tax liability. So, we show you four methods to reduce tax on your long-term gains made from equity and equity-oriented investments.
Investors are allowed a basic exemption of Rs 1 lakh every year on long-term capital gains (LTCG) from the sale of equity shares or equity-oriented fund units.
So, if you don't need to withdraw all your investments at once, consider spreading out your withdrawals over multiple financial years. This way, you can reduce your tax liability.
For example: Let's say you have Rs 2 lakh long-term gains from equity shares. You can cash out Rs 1 lakh in a given year to reduce your tax liability. Try to wait until the next financial year to redeem the remaining Rs 1 lakh to avoid tax on it. If you cash out all at once, you'll owe Rs 10,000 in taxes [(2 lakh - 1 lakh)*10 per cent].
Long-term capital gains can be used to set off both short-term and long-term capital losses . If your long-term capital gains, after applying the basic exemption, exceed Rs 1 lakh, consider setting off some losses at the end of the year. This will effectively reduce your tax liability.
For instance, imagine you have long-term capital gains of Rs 1.4 lakh and capital losses of Rs 40,000. In such a case, you have to pay taxes on LTCG, as shown in the below table. But if you choose to set off the losses against the gains, you won't owe any taxes. See the table below.
|If loss is not realised
|(1.4 lakh - 1 lakh)*10% = 4,000
|If loss is realised
|(1.4 lakh - 1 lakh - 40,000)*10% = 0
To reduce capital gains tax, your investment choices matter. For a debt-heavy portfolio, opt for products with debt-like features, like equity savings funds , which are taxed favourably like equities. Avoid investing directly in debt or debt-oriented funds, as they incur higher taxes (especially burdensome if you're in a tax bracket over 20 per cent).
For a mixed portfolio of debt and equity, both face different tax treatments. Consider switching to equity-oriented hybrid funds, which offer exposure to both asset classes with tax treatment similar to equities. For a 60 per cent equity and 40 per cent debt portfolio, equity hybrid funds with over 65 per cent allocation to equity can help you maintain a lower 10 per cent tax rate on your gains.
While not applicable to everyone, if you happen to be planning to build a new house or invest in a house property, then Section 54F can assist in minimising your capital gains tax. Here's how:
Step 1: Sell a non-property asset (can be anything like stock investment or gold sale)
Step 2: Use the long-term capital gains to:
Read more on Section 54F here .
Please note that starting from April 1, 2023, the maximum exemption limit under this section is capped at Rs 10 crore.
These are some smart ways to efficiently reduce your tax burden on long-term capital gains. Choose the option that suits your needs to ensure you don't pay unnecessary high taxes. Remember, money you save is money you earn!
Also read: Is tax harvesting a good idea?