Equity mutual funds qualify for LTCG tax in 1 year, debt funds in 3 years
Indexation benefits will apply on debt funds and after indexation, a 20% LTCG tax will apply on the gains
I invest in mutual funds every month, but plan to redeem Rs1 lakh every year starting from the fifth year. How will long-term capital gains (LTCG) tax apply?
LTCG tax differs from one fund type to another—both the definition of the period that qualifies as long term as well as the tax rate that applies. For equity funds, long term is 1 year and for other funds (including debt funds) long term is 3 years. In your case, since you will be withdrawing from the 5th year onwards, assuming the amount you are withdrawing (Rs1 lakh) would materialize from units bought at least 3 years before the date of redemption, all your redemptions will be considered long term. For equity funds, gains accrued until 31 January 2018 will be tax-exempt, and gains after that will be subject to a 10% tax. For debt funds, indexation benefits will apply (the cost of investment will be raised by, roughly, the inflation during the period of holding—this will reduce the gains on which taxes will have to be paid), and after indexation, a 20% tax will apply on the gains.
I am 27 years old and I can invest Rs20,000 a month in mutual funds. My risk appetite is moderately high. My aim is to generate regular returns in 5, 10, 15, 20 and 30 years. Which schemes and fund categories will help me save tax, earn short-term and long-term returns and generate a retirement corpus?
As a young person with moderately high risk appetite, you have lots of options on the funds you can invest in and your portfolio design. However, given your various time frames, I’d suggest a simple approach. For your time frame of 5 years, which is relatively medium term, you should set aside investments in a separate portfolio, and the remaining amount in another portfolio.
For medium term, you can invest in a pair of equity oriented hybrid funds—HDFC Balanced fund and ICICI Prudential Equity and Debt fund would fit the purpose well.
For your long-term portfolio, you can go with a more aggressive approach of investing in equity funds entirely. Funds such as Mirae Asset India Equity fund, Franklin India Prima Plus fund, and L&T India Value fund will suit this portfolio (these belong to large-cap, diversified, and mid-cap categories, respectively). You can also look at Mint 50 catalogue of funds. How much money you need to place in each of these portfolios should be decided by how much you would need in five years, and what amount of systematic investment plan (SIP) is likely to generate the corpus. For saving tax, invest in equity-linked saving schemes (ELSS) such as Invesco India Tax plan and L&T Tax Advantage fund.
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Srikanth Meenakshi is co-founder and chief operating officer, FundsIndia.com
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