At a fundamental level, we can
grow our wealth by either saving more money or earning more money. One of the
most popular ways that salaried professionals save in India is by investing in
tax saving instruments. Majority of us, especially, in the first couple of
years just think about the saving part and all the research is around the
multiple tax savings instruments. You know the ones, Section 80C, House Rent
Allowance, Leave Travel Allowance etc.
However, there are other tax
saving avenues which we overlook, and they are the ones that really can make
the difference. Let us pick one such category that is not usually considered
but can be a great source of tax savings. You must have heard the term capital
gains? It is the profits we earn through sale of capital assets like stocks,
mutual funds, gold, property etc. For taxation purposes, the capital gains are
classified as Long-Term Capital Gain and Short-Term
Capital Gain depending on the holding period of the capital asset.
The minimum holding period for
each of the capital assets for the gains to be classified as long term is as
(a) Stocks and Equity Funds: 1 Year
(b) Debt Oriented Funds: 3 Years
(c) Gold ETF’s and Gold Funds: 3 Years
Property: 2 Years
Now for the interesting part, tax
rates for capital gains are different, based on how they are classified. if you
understand and apply the concept explained below, you will accrue tax savings potentially in lakhs over your
For example, consider two
individuals Shruti and Amit, both in the highest income tax bracket of 30%. Shruti
has a long-term view and usually does not touch her investments and Amit always
looks to time the market. It is April 1, 2018, both Shruti and Amit have
surplus income of Rs 10 Lakhs to invest and they decide to invest all of it in
equity mutual funds. For simplicity, let us assume that both of them invest in
exactly the same set of funds.
In the next 11 months, the amount
invested grows to Rs 11 lakhs. Shruti does not touch the money but Amit lured
by the gains in his investment, redeems all the funds and pockets the gain.
Since Amit sells before 12 months, his gain is treated as a ST Capital Gain.
The tax outflow for Amit is Rs 15,000 (15% of the Rs 100,000 gain for equity). In
the example, the after- tax returns for Amit works out to 8.5% (Gain of Rs
85,000 on Rs 10 Lakhs) but had he sold after April 1, 2019 i.e. after a year of
holding, his returns would have been 10% (Gain of Rs 100,000 on Rs 10 Lakhs) a
full 1.5% more or Rs 15,000 in absolute terms. This is because the gains are
treated as Long Term and as a result, the
tax outflow is 0% (LT capital gain tax of 10% is applicable only if the
gain is above 1 lakh).
An extra return of 1.5% for an
additional month of holding is pretty significant to overlook especially, if
the amount invested is high. However, an oversight on our part does happen
especially, if we have a lot of asset classes to track and do not have the time
to either record or review all the transaction dates.
Although, we have taken an
example of equity funds above, the same logic applies to the other asset
classes like gold, real estate and debt funds. In fact, the impact would have
been even more significant for the latter as the short-term capital gains on
these assets is taxed at your current tax slab rate which in all probability is
In conclusion, though we should definitely continue to save our hard-earned money by leveraging the popular tax savings instruments, we should also be mindful of the other avenues of saving taxes. Particularly, the opportunity to save taxes by holding on to our capital assets long enough for the capital gains to be classified as long term.