The Mutual Funds Investment Thread

[TheSloth]

No Problem

I am reading about Tax Harvesting first time. I will read about it and come back because I didn't understand.

 

[Nerevarine]

The govt grants 1.25 lakhs worth of LTCG free from tax. Your LTCG will only apply after 1.25 lakhs worth of capital gains per financial year.

Im giving you an example:
Lets say you invested 1 lakh lump sum today, and every year it gains 1 lakh in capital gains.

Year0
1 lakh invested.
Year 1
1 lakh invested + 1 lakh capital gain
Year 2
1 lakh invested + 2 lakh capital gain.

Lets say you withdraw the entire amount at the end of year 2. So total capital gains = 2 lakhs.
exempt amount = 1.25 lakhs. Taxable amount = 2 lakhs - 1.25 lakhs = 75K.
You pay 12.5% LTCG on it = 9375

Now with Tax harvesting what you do.

Year0
1 lakh ivnested

Year 1
1 lakh invested + 1 lakh capital gain. Withdraw the entire amount = total capital gains is less than 1.25 lakhs, so everything is tax free
Next day.
Put entire 2 lakh amount back into same mutual fund. Thereby making it lump sum principal.

Year 2
2 lakh invested + 1 lakh capital gain

At the end of year 2, you withdraw everything. Same 3 lakhs in total as in the top example but now, your capital gain is considered only 1 lakh. It it totally exempt from tax.
So you get to have the entire 3 lakh withdrawal without paying single rupee in taxes.

Tax harvesting works for capital losses as well and you can carry forward your losses.

 

[shreeux]

The govt grants 1.25 lakhs worth of LTCG free from tax. Your LTCG will only apply after 1.25 lakhs worth of capital gains per financial year.

Im giving you an example:
Lets say you invested 1 lakh lump sum today, and every year it gains 1 lakh in capital gains.

Year0
1 lakh invested.
Year 1
1 lakh invested + 1 lakh capital gain
Year 2
1 lakh invested + 2 lakh capital gain.

Lets say you withdraw the entire amount at the end of year 2. So total capital gains = 2 lakhs.
exempt amount = 1.25 lakhs. Taxable amount = 2 lakhs - 1.25 lakhs = 75K.
You pay 12.5% LTCG on it = 9375

Now with Tax harvesting what you do.

Year0
1 lakh ivnested

Year 1
1 lakh invested + 1 lakh capital gain. Withdraw the entire amount = total capital gains is less than 1.25 lakhs, so everything is tax free
Next day.
Put entire 2 lakh amount back into same mutual fund. Thereby making it lump sum principal.

Year 2
2 lakh invested + 1 lakh capital gain

At the end of year 2, you withdraw everything. Same 3 lakhs in total as in the top example but now, your capital gain is considered only 1 lakh. It it totally exempt from tax.
So you get to have the entire 3 lakh withdrawal without paying single rupee in taxes.

Tax harvesting works for capital losses as well and you can carry forward your losses.

You mean
Before 31st March or earlier?
Again invest 1st April or later?

 

[Nerevarine]

Year 0 - invest on April 1.
Year 1 - withdraw on April 2 (when LTCG is in place) - google it.
Deposit it again on April 3. Technically you can deposit it instantly and it would be counted correctly but it's best to do it the next day.
Year 2 - Withdraw on April 4, When LTCG is in place.
and so on.

 

[Vyom]

Great explaination of Tax Harvesting by Nerevarine and with illustrations.
I would like to add that this 1.25 LTCG exemption limit has been changed from this financial year. But until last year it was only 1L. Been doing Tax harvesting since last 2 Financial years now. Glad to save any taxes we can until Nirmala didi is letting us do.

 

[TheSloth]

So this tax harvesting can be done for all the investments, equity, FD?
What about the Long Term investment of 10-15 years? I should withdraw that too every year and reinvest?

 

[Nerevarine]

So this tax harvesting can be done for all the investments, equity, FD?
What about the Long Term investment of 10-15 years? I should withdraw that too every year and reinvest?

Anything that is capable of "capital gain" not "interest".
Equity MF, stocks etc.

Yes, withdraw every year up to the limit of 1.25 lakhs in capital gains (not total amount) and then reinvest.

 

[Desmond]

How do you withdraw lumpsum from MFs? IIRC you can only withdraw like 50k at a time max.

So we withdraw in multiple installments?

 

[Nerevarine]

How do you withdraw lumpsum from MFs? IIRC you can only withdraw like 50k at a time max.

So we withdraw in multiple installments?

There is no issue with withdrawing in multiple installments. What is required in your end of year tax filing is how much total you have withdrawn (in LT capital gains) per FY.
You can withdraw - deposit, withdraw - deposit. But calculate well what would be total capital gain should be under 1.25 lakhs.

Also, without being said. only do this when markets are not volatile.
You would want the withdrawn amount to be almost equivalent to deposited amount. Make sure nothing world-shattering happens in that 1 day between withdrawal and deposit.

 

[Zangetsu]

I have 2 Tax Saver MFs I bought in 2019 for 80C tax saving purpose. And I haven't withdrawn them yet. Should I withdraw them now and invest in other MFs or Keep them as it is ?

 

[Nerevarine]

I have 2 Tax Saver MFs I bought in 2019 for 80C tax saving purpose. And I haven't withdrawn them yet. Should I withdraw them now and invest in other MFs or Keep them as it is ?

Yes, every year you should be doing some sort of tax harvesting. Tax Saver MFs only cut down your taxable income, their capital gains are still taxable when you withdraw them.

Tax harvesting if done well, every year you get Rs 15,625 for free. (1.25 lakhs worth of capital gains * 12.5% LTCG tax)

 

[rockfella]

I have 2 Tax Saver MFs I bought in 2019 for 80C tax saving purpose. And I haven't withdrawn them yet. Should I withdraw them now and invest in other MFs or Keep them as it is ?

I would keep them and invest in it regularly. They save taxes (Old regime) and after 10 years the entire amount invested almost doubles in 2/3 years as compounding become very aggressive.

 

[rockfella]

Yes, every year you should be doing some sort of tax harvesting. Tax Saver MFs only cut down your taxable income, their capital gains are still taxable when you withdraw them.

Tax harvesting if done well, every year you get Rs 15,625 for free. (1.25 lakhs worth of capital gains * 12.5% LTCG tax)

Please share how to do this.

 

[SaiyanGoku]

At the end of year 2, you withdraw everything. Same 3 lakhs in total as in the top example but now, your capital gain is considered only 1 lakh. It it totally exempt from tax.
So you get to have the entire 3 lakh withdrawal without paying single rupee in taxes.

Understood, you are basically resetting the principal amount and in the process, the LTCG part shrinks.

 

[Nerevarine]

Understood, you are basically resetting the principal amount and in the process, the LTCG part shrinks.

Exactly. harvest your taxes every year.

 

[Nerevarine]

Please share how to do this.

I explained with an example in post above. You can harvest 1.25 lakhs worth of capital gains per FY totally tax free. If you dont do it, when you eventually withdraw your money, you would need to pay Rs 15,625 on it.

 

[Nerevarine]

BTW this is a very good product idea, if groww or zerodha implement "auto-harvest" in their apps.

 

[Zangetsu]

Yes, every year you should be doing some sort of tax harvesting. Tax Saver MFs only cut down your taxable income, their capital gains are still taxable when you withdraw them.

Tax harvesting if done well, every year you get Rs 15,625 for free. (1.25 lakhs worth of capital gains * 12.5% LTCG tax)

What if we keep the entire investment for long term lets say 5 years and after 5 years withdraw entire amount and invest in another MF

 

[rockfella]

What if we keep the entire investment for long term lets say 5 years and after 5 years withdraw entire amount and invest in another MF

The best part of long term investment begins after 10 years when compounding becomes so aggressive that your entire invested amount doubes in 2/3 years. I won't withdraw after 5 years. It is like planting seed of a mango tree then cutting it half way just before it starts giving real good mangos

Here:
View attachment 1724768537912.png
5 years.

View attachment 1724768570510.png
10 years

View attachment 1724768636339.png
3 extra years from 10th year! (13 years)

This is one of the greatest aspect of compound interest which folks don't realize

 

[omega44-xt]

What if we keep the entire investment for long term lets say 5 years and after 5 years withdraw entire amount and invest in another MF

You pay LTCG on profits (after crossing 1.25L). Not much incentive other than harvesting some profits, better to use the method mentioned earlier for maximum tax savings.