Mutual funds provide a convenient way to invest across diverse assets and build long-term wealth. However, taxes on capital gains can eat into your returns. Proper tax planning is essential to reduce your tax liability and achieve major financial goals like accumulating a Rs 5 crore portfolio. Here are some useful strategies.
Optimize equity funds for long term gains
For equity funds held over 12 months, long-term capital gains (LTCG) up to Rs 1 lakh are tax-exempt. Beyond that, LTCG are taxed at 10% without indexation. Holding good equity funds for over 1 year allows you to enjoy lower LTCG tax. Invest systematically for long tenure and avoid churning your portfolio.
Use ELSS for tax deduction
Equity Linked Savings Schemes (ELSS) offer tax deduction up to Rs 1.5 lakh under Section 80C. The 3-year lock-in also encourages long term investing. Opt for ELSS funds from leading fund houses when investing your 80C limit. The tax benefit will enhance your overall investing capacity.
Rebalance to book long term gains
Rebalance your portfolio at least annually to book long term gains selectively in equity funds. Maintain your asset allocation across equity, debt and gold. Book long term gains above Rs 1 lakh in funds with highest gains and shift that money into funds with lower gains to reset the cost basis. This staggeringly books profits at 10% LTCG rate and reduces future tax liability.
Set off losses to reduce tax
If you redeem equity funds at a loss, use it to your advantage. Short term losses can be set off against short-term gains, and long-term losses against long term gains, in the same financial year. This reduces your net capital gains and ultimately your tax liability. Maintain records to efficiently utilize loss set offs while filing returns.
Opt for dividend option in debt funds
For debt funds held less than 3 years, consider dividend option instead of growth. Dividends from debt funds are tax free in investor’s hands. This avoids high taxation of short-term debt fund gains. Use dividend sweep plans to regularly book gains in form of tax-free dividends.
Invest online and track systematically
Investing in mutual funds online via systematic investment plans is convenient and helps track investments easily. You can invest in direct plans and compare mutual funds’ performance. Maintain all transaction records digitally to calculate capital gains/losses accurately for filing returns.
By making smart choices on tax saving mutual fund categories, holding funds for long term, setting off losses, rebalancing, opting for dividend plans, donating units, and investing systematically, you can structure your portfolio optimally. This reduces tax incidence and lets you build substantial corpuses to achieve important financial goals and secure your future. Consult a tax advisor to utilize all permissible deductions and rebates.