Saturday, February 10, 2018

Systematic Withdrawal Plan will be the instrument to fight Long Term Capital Gain Tax

Its been about a week that our finance minister read out the budget to the nation, but I still cant get out of the angst of levying 10% tax on #long term capital gain on equity and mutual funds investments. 

Though the markets have reacted in the expected lines by shading about 500 points on Nifty, I expect it to settle at some point in about few months depending on the course of action decided by the large institutional investors. The sudden shock of introducing #LTCG after 14 years on Equity will be hardest on the small investors, who have been told continuously over the years that equity is the best investment option and investing through #SIP in Mutual Funds is the best option.

What is long term capital gain tax on equity - When an investor buys and keep his equity investment over a year and withdraws, the profit generated on the investment is subject to taxation if it is above Rs. 1 lakh. This is applicable to all investors including individual, HUF, FPI. Mutual Funds have been exempted for this, as this is taxable in the hands of Investors.

Also, Mutual Funds will levy 10% dividend distribution tax on dividend options under various equity schemes.

(Short term tax on equity and equity based mutual funds stand at 15%)

#SWP Calculator
Things were different until 5 days back, when capital gain tax was zero over 1 year, but now we have to learn and adjust to the new normal. What we understand basis the announcement is if we make profit over 1 lakh in a financial year on equity or equity based mutual funds, we have to pay tax on the money over 1 lakh on the long term capital gain (over 1 year). Refering to the chart below on illustration, the tax is applicable to the profit generated over and above 1 lakh. Also, as the budget will only come into effect from April 1, returns above 1 lakh wont be taxed.

Long term capital gain calculation sheet
Investment amount
Entry date
Exit date
Gain = Amount - Investment
Tax applicable
Net Profit
1st Jan 12
1st Mar 18
3 lakh
1st Jan 12
1st Mar 22
10% of 5 lakh
= 50 thousand
5.5 lakh
Equity MF
1st Jan 12
1st Mar 18
2.5 lakh
Equity MF
1st Jan 12
1st Mar 22
10% of 4 lakh = 40,000
4.6 lakh

Incase of #SWP,  profit will be spread per unit basis. Spreading out the withdrawal over a period will be beneficial for tax saving.

What is SWP?

SWP Is a disciplined approach towards investments withdrawal. From a mutual fund scheme investor can chose to withdraw a fixed sum of money or pre-decided number of units of units every month. (This is not dividend scheme). This is nothing but selling investments, booking profit but just in staggered manner.

Recommend highly as post-retirement earning or for people on sabbatical. It also work out well for second income generation. To illustrate the benefits on a table, I have taken a hypothetical investment of Rs. 5 lakh in 2013, in an equity scheme. 

I have made an illustration on SWP for better understanding on the same. The table is drawn with an assumption that the fund value has grown to Rs. 10 lakh. The sum of Rs. 15 thousand to be withdrawn from the period of April 2018 to March 2019. 

In the above case, the investor have to pay any tax on 10% Tax on three thousand eighty three that is Rs. Three hundred and eight only on his withdrawal.  

By no mean I am portraying tgat you can escape LTCG Tax completely by following this method. It can be used as a method if you dont require the money at one go. It can work like a pension and can be withdrawn to be tax efficient. One may also consider having other pension options which are tax efficient in nature. 

The benefits of SIP have been spoken about a lot. It is about time that we start taking a view on SWP as a tool for withdrawal to make most of the mutual funds investments. SWP Mutual Funds reminds us time and again about discipline. It can beautifully work as a pension or work like extended salary in time of need. It is not required to be a market specialist to invest in it. Choose an equity fund and keep investing for the long term.

This is only applicable to open ended equity and equity based hybrid mutual funds.
systematic withdrawal plan, SWP Calculator, 
Keep investing!!  

Tweet me at debashree_ad for any clarification.

Tuesday, January 23, 2018

Life is all about goals, with discipline, we can reach there with ease!

Our life begin with goals. I may not recollect my #LifeGoals of my toddler days, but I do remember my goals beginning the age of 10. I had a dream of earning money and gifting my parents, aunts a lot of things, I used to note my wishes down in a diary about my wish-list. When I grew older, I realised, to fulfill those desires, I must earn my own. So, my full attention went towards making my academic efforts towards a career building process. I told myself, every page I am reading is adding towards my #LifeGoals of getting a decent job and saving-up. People of my age may not be as money minded I was back then, but if I look back, it was nothing but having a goal and planning towards it knowingly or unknowingly.

Cut to 2018. I am sorted with my financial planning, and revisit my portfolio and contingency plans on regular intervals. However, I realise, with sound understanding about various financial and other asset classes, only my contingency fund and term insurance plan I am satisfied about. I started working 10 years back, but I am yet to plan for a Europe trip, a house of my own and my dream car. I wonder, though I kept saving and investing a sizable portion of my salary each year, I never bucketed them under heads. So, now, my savings may allow me to withdraw from any investments and execute some of my plans but I don’t feel comfortable.

So to not make the mistake I committed, here is what you can do. As you start earning, divide your monthly income* under few heads - first priority should be buying adequate Life Insurance, a health insurance and start creating a contingency fund.
All our goals can be bucketed broadly under 4 categories.

1.    Short-term goals
2.    Medium-term goals
3.    Long-term goals
4.    Post retirement planning

Short-term goals
Depending on your age the goals can vary. To keep it short and crisp, I am assuming you have just started working, and about 21-25 year old, your short-term goal, may be buying a Mac-book, International trip with friends and paying off education loan etc. To attain this goals, you may consider a bank fixed deposits, bond funds, debt-oriented hybrid funds etc, it has certain amount of stability with limited return on investment, main aim of these investments is to accumulate and block the amount for the goals.

Medium-term goals
For a 21-25 year old, medium term could be 4-7 years. In this span, one may like to save-up for the down payment of housing loan, kitty for marriage expenses, honeymoon abroad and buying the first car. I am of an opinion that saving-up the installments is much better than buying on EMI. One may consider buying Hybrid mutual Funds in SIP, which will have upto 30% debt exposure to cushion equity market volatility. You may also consider large-cap equity funds if you have better risk appetite. These investments are likely to give much higher return compared to fixed instrument. One may see 10-12% upside on the capital invested. Monthly SIP is highly recommended in this scenario

Long-term goal
Typically over 7 years is considered long term in financial asset classes. For the goals like Child-birth, Children education, upgrading lifestyle, house and cars, medical expenses are highest at this phase. One may consider buying #ULIPs or equity mutual funds to substantiate the take-home salary or cushion as a second income.Fo this phase, one may consider buying aggressive portfolio of 100% equity linked products. Mutual Funds and ULIP both allows this. A sizable portion, atleast 10-15% of your income should be allotted in this category. Most of the Open-ended equity mutual funds and ULIPs allows the flexibility of partial withdrawal. Hence, the long-term investment can go on parallel with withdrawal benefits.

Retirement planning
Last, but the most important of all goals, we may call it as an Ultra long-term plan. Though many big companies provide PF facility for the employees, which accumulates alongside through the employment tenure, the low return may not be lucrative enough to completely depend on this for entire retired life. With inflation at high levels and growing living standards, we must plan start planning early for retirement.

ULIP comes as the best option for this category. With IRDA’s initiative, #ULIP products have capped the fund management charges at 1.35%, (lower than direct mutual Funds) and with mortality charges the products are capped at 2.25%. (lower than regular funds) The new wave of the ULIP products are investor friendly and for long-term commitment, when you have 15-20 years goal, you should consider this product in your portfolio. ULIP is nothing but insurance-cum-investment product. With stringent norms and zeal of the dynamic insurance companies, it has become a lucrtive investment product, which also provide insurance. With a long term disciplined investment, it helps create a sizable portfolio to take care of the post-retired life. You may consider shifting the corpus in an annuity plan or simply take interest payout on a senior citizen deposits. Life likely to be much more easy. Its #InvestBefikar

Few key features of this product you must know –

1.    The investment amount is eligible for 80C investments
2.    It has low lock-in of 5 years (you must not withdraw at that point until you have a dire need)
3.    The Insurance cover in this product is atleast 10 times the annual premium
4.    Incase of death of the policyholder, he/she shall get Fund value or the sum assured which ever is the higher
5.    ULIPs have choice of fixed income and equity funds under them to choose from
6.    You need to pay a fraction of service tax upfront on each premium
7.    Maturity amount is tax-free
8.    Post 5 year lock-in period partial/ complete withdrawal is possible (may be with surrender charges and penalties)
9.    It can be bought online as well as offline

The importance of goal based planning became all the important for me, after attending the bloggers meet recently organised by Bajaj Allianz Life Insurance. With a few quiz and games, it opened up the unexplored part of planning, which I wrote above as a note for my readers. The event organised by the Bajaj Allianz Life Insurance reiterated their commitment to create wealth for their investors along with the life insurance. They realise and advocate goal based planning to promote #InvestBefikar with  #ULIPs. Really liked their investment orientation for goals of life and not vice versa.   

To conclude, the moving dart board at the #BajajAllianzLifeInsurance bloggers meet, reminded me, life keeps moving. You can throw the dart at the right place only with planning and practice. 

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