How To Pay Lower Tax And Earn More On Your Investments

By Adhil Shetty | January 24, 2018

It is wise to ensure that any gains you make through investments in Mutual Funds are not taxed. Read on to know about some factors that can help you potentially trim the tax.

How To Pay Lower Tax And Earn More On Your Investments

If you rely on your monthly salary as a source of income, you likely already pay income tax as per your respective tax slab. If you then decide to invest in Mutual Funds for long-term wealth creation, it is prudent to ensure that any gains you make through those funds are not taxed.

Here are some factors to keep in mind to potentially trim the tax from capital gains from your Mutual Funds of choice.

Long-Term Investing

Both equity and Debt Mutual Funds offer several provisions to help you reduce or negate capital gains tax on your investments. In case of equity funds, you merely need to hold onto your units for a period of one year or more for your gains to qualify under the long-term bracket. Taxation on such long-term capital gains is zero.

In case of debt funds, there are long-term capital gains of 20% for units held in excess of 3 years. However, this tax is applied with indexation, enabling you to reduce your tax outgo, the longer the tenure.

Balanced Funds

An ideal instrument that helps your corpus juggle between equity and debt without any significant tax impact are balanced funds. If it has holdings dominant in equity, then it is an equity-oriented balanced fund, and as mentioned above, gains over a year old fall under the ambit of long-term capital gains.

Even though such a fund’s holdings may veer between equity and debt through the course of a year, you needn’t expect any tax impact as long as you stay invested in such a fund.

Pause your SIPs

In case you are short on funds and are planning to redeem your Mutual Fund units for additional liquidity, you may attract short-term capital gains tax on units that may not qualify for long-term capital gains. In such cases, it is recommended that you pause your SIPs instead: this will help you with funds that were otherwise dedicated to those funds, and will allow your existing units to remain invested in the market.

In addition to capital gains that may be taxable, some mutual funds also charge an exit load if you were to redeem your investments before a set period of time. Make sure you are aware of all the terms and conditions contained therein before you make a decision one way or another.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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