Hacks to avoid LTCG tax

Ranjan Saxena is surprised by the criticism for the proposed LTCG tax. “Why should anybody mind paying 10% of his gains in tax?” asks the Delhibased retiree. Saxena’s portfolio is not very big. His total investments in equity funds is only Rs 2 lakh, and his gains are unlikely to cross the tax-free limit of Rs 1 lakh for several years.

But Mumbai-based Preeti and Uday Salunke (see picture) are in a different boat. With an equity fund portfolio of roughly Rs 15 lakh and SIPs of Rs 25,000 a month, their investments are growing and could attract tax when they withdraw in a few years. Their best bet is to start investing in the name of their son Aditya. Gifting money to a child above 18 and then investing it is perfectly legal. “You can gift any amount to your child without any tax liability,” says Sudhir Kaushik, Co-founder of Taxspanner.

TAKE THE HELP OF AN ADULT CHILD

Tax rules say that after a person turns 18, he is a separate individual and his earnings will not get clubbed with his parent’s income. If the Salunkes invest in Aditya’s name, he will not only be eligible for the Rs 1 lakh exemption for capital gains but also the Rs 2.5 lakh basic exemption and the Rs 1.5 lakh deduction under Sec 80C. Effectively, he is not getting into the tax net for several years.

In another part of Mumbai, PSU manager Ajay Bajaj and his wife Supriya are sizing up their equity portfolio. With almost Rs 32 lakh in stocks and mutual funds, they are likely to cross the Rs 1 lakh threshold very soon. However, they are not too worked up by the LTCG tax. “Even after 10% tax, equity remains my preferred investment because it gives better returns than other asset classes,” says Ajay.

HARVEST GAINS REGULARLY

Investors like the Bajajs should get into the habit of harvesting their gains on a regular basis. Even if they intend to hold a stock for the long term, it makes sense to churn the portfolio. Sell your stocks to book long-term capital gains, and then buy back the same scrips. This way you reset the acquisition date and can book short-term or long-term losses if the stock prices recede from these levels. Suppose you bought 1,000 shares of a company at Rs 150 apiece in February 2018 and the stock rose to Rs 220 by March 2019. You would have made long-term gains of Rs 70,000. If you sell all the shares in March 2019, and buy them back, your acquisition price will be reset to Rs 220 and the date of acquisition will become March 2019. Now if the stock rose to Rs 300 in another 12 months, your gains will only be Rs 80,000 and still tax free.

On the other hand, if you had not sold off at Rs 220, your acquisition price would have been Rs 150 and your total capital gain would have been Rs 1.5 lakh. Of this, Rs 50,000 would have been subject to tax.