The new proposed tax on LTCG (Long Term Capital Gains) equity funds has peeved retail investors. Investor’s returns will be lower now. The new tax might change the way of investing.
In fact, the ELSS (Equity Linked Savings Scheme) might lose the status of tax-free income which made it favor the investor to save tax.
According to the new rule, equity funds will not be allowed for indexation benefits, and the tax benefits on equity funds have decreased to make debt funds and fixed maturity plans alluring.
Do Not Ignore ELSS
The unit-linked investment plans and PPF (public provident fund) will still be tax-free but the profits from ELSS will be taxable at 10%. But according to financial experts, investors should not ignore the ELSS.
Because of the equity-based pure investment scheme, ELSS can give higher returns compared to other investments. Irrespective of the new tax ELSS still can be a better investment option for investors.
ULIPs being low-cost only insurance companies that sell it online, might give good returns compare to ELSS in the long run. But compare to ULIPs, ELSS offers better resilience. Investors need not be invested their money in one scheme over the year they can switch to another investment scheme if the current funds are outperforming.
Investors can only switch between funds if the ULIPs offer them. ELSS might have some other shine but it still remains one of the best options for tax under section 80C. The lock-in period for ELSS is three years only which less than other investment options under section 80C.
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Escape Insurance Policies and ULIPs
Post budget announcement that tax on LTCG (long-term capital gain), the insurance provider is started offering tax-free returns for insurance policies and unit-linked investment plans. But our suggestion is to avoid this insurance product and ULIPs because these are tax-free but will give you lower returns.
According to market expert mutual funds still remains the investor’s first choice. However, we should not mix insurance products and mutual funds investment because term insurance can serve as life protection but mutual funds give higher returns.
The combo of insurance products like PPF and investment schemes like ELLS can serve better if you want to save tax under section 80C of the IT Act. Where ELSS provides higher returns and PPF will give a stable income. Attractively combo of ELSS and PPF every investor should keep in their investment portfolio.
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Program Trading Investment
Equity Program trading funds, a subcategory that offers liability-like returns and equity-like taxation advantages, is also under the new tax. Now Program trading investment is commensurate with those short & very short-term debt funds. Retail investors would like to invest in these short-term investment goals to gain taxation benefits.
However, the debt funds now have to pay 28% of DDT (dividend distribution tax) there were no DDT funds. In the same way, the long-term capital gain was tax-free once investors completed one year of investments. Investors who had invested in debt funds had paid 20% of tax even after holding the investment for three years.
Although equity funds are likely to suffer from tax on LTCG and DDT tax, market experts say planned trading funds are the best option for short-term investment funds even now. This short-term investment can still generate higher returns after taxation than other investment options.
If you look for the tax rate they are still good on these funds compared to debt funds, for example, debt funds investors have to pay a total of 29.12 % tax after April 1st, 2018 and the tax for arbitrage funds will be 10.4%. Likewise, tax benefits are more if the investment holds for one to three years.
It is a piece of good news for arbitrage funds because increased market volatility will give a good opportunity for arbitrage funds. But either way, long-term increased market volatility will be harmful to arbitrage funds too.
Dividend options make more sense in funds like arbitrage. Actually, the taxation on the short-term capital gain will be 15% whereas dividends funds will have to pay 10% of tax.
One can gain the benefits of arbitrage funds by buying and selling the funds in a different market. Anyway, arbitrage funds can be more volatile in short-term investments. The ideal period of investment in these funds should be six to twelve months.
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The Right Time to Buy Debt Funds
In most cases, retail investors ignore debt funds. The reason behind this is tax is calculated on returns. Tax on LTCG (Long-term capital gain) is taxed at 20% which is fixed but in short-term investment taxes are being charged normally.