How LTCG affects your equity investment options

In India, the taxation system has been detailed. The taxation regimes often bring about many changes depending on the needs of administrative goals. Amongst the various changes in rules, the government of India has made changes in the Long Term Capital Gains (LTCG) taxation system. The LTCG changes have been applicable from April 1, 2018, which has brought about changes in the equity markets.
Before knowing how LTCG has impacted the equity investment options, let’s first understand what LTCG is in detail:
What is Long Term Capital Gains Tax?
Many investors pay taxes on the profits garnered from assets like shares, real estate, and so forth held for a stipulated time. The taxes paid in return of the profits are termed as LTCG tax. For instance, you should pay a 10% tax on profits exceeding Rs. 1,00,000 made from the sale of equity investments.
The definition of LTCG can vary depending on the types of investment products. In the case of equity investments, long-term typically means a holding period, which can be more than a year from the date of purchase.
Now that we have a basic idea about LTCG, let’s proceed further to understand how LTCG impacts equity investments:
According to the latest developments in taxation rules, the capital gains made on equity-related investment plans like equity mutual funds will be taxable from April 1, 2018. The primary reason for making LTCG tax-free is to increase the participation of Indian investors in the equity markets.
After the applicable rules, many investors have started investing their money into equities. In 2017, there has been a significant increase in mutual funds portfolio. The number has increased from 1.37 crore to 6.65 crores in 2017 in India.
The LTCG earned before 31 January 2018 is not subjected to the new taxation rules. For instance, let’s assume you have purchased an equity share of Rs. 100 on January 1, 2016. Now, you sold the same equity share for Rs. 150 on January 1, 2018. The LTCG of Rs.50 (150-100) would still remain tax-free since you earned it before January 31, 2018.
Although LTCG is a bane for many investors, you should diversify your investment portfolio to benefit from the upgraded taxation system. During such a scenario, you should invest in a Unit Linked Insurance Plan (ULIP) to secure your finances and safeguard your financial edge. ULIP policies act as effective tax saving options on the premium as well as maturity proceeds.
Under Section 80C of the Income Tax Act, 1961, you can claim a deduction up to Rs. 1,50,000 on your taxable income. When you opt for an investment option like a ULIP policy, you receive a payout on the maturity of the ULIP policy. This maturity payout is tax-free under Section 10(10D) of Income Tax Act, 1961.
A ULIP investment gives you the liberty to choose between multiple fund options like equity funds and debt funds. In addition to this, you can switch between these two funds based on market volatility. Switching feature of a ULIP policy allows you to grow your corpus and secure it from the market risks. A ULIP policy is the right investment plan to not only ensure the growth of your funds but also reduce tax liability.
In a nutshell, although equity investments are a risky affair, they are the right choice for wealth accumulation. As an investor, you should know how to invest money in equities. The right investment plan can emerge into a viable instrument to gain a substantial return on investment.