If ‘location, location, location’ is the mantra for success in real estate, then ‘timing, timing, timing’ is the mantra for success in investments. It is very important to get your timing right when you want to sell your investments. The other factor you need to keep in mind is the tax implications of selling your investments.
Why this matters?
Like it or not, all investments come with a certain tax liability. However, they are not all taxed equally. The taxation differs based on various factors such as the type of investment, the holding period and the investor’s tax bracket. By being aware of these aspects, it is possible to reduce your tax liability. In other words, you can keep a greater share of your earnings for yourself.
Here are a few steps you can take to reduce your tax liability:
1) Why are you selling?
There always comes a time when you may want to sell your investments. At that point in time, ask yourself the reason why you are selling. Are you selling to fund an expense in your life (buying a house or paying college fees for your children) or do you want to book profits and exit from the investment? If the answer is the latter, it is best to book your profits when the market is at a high.
For example, if you have invested in an equity fund, it can be quite beneficial to sell the fund and book profits when the market is on a bull run. This way, you can maximize your returns on the investment.
2) What investment to sell?
As an investor, it is possible that you have invested in many different assets. You would have invested in equity funds, debt funds, balanced funds and so on. When you plan to liquidate investments to fund a financial goal, it is important to choose wisely which investment to sell. As mentioned earlier, different investments attract different tax rates.
Here is how the time limit is classified for different mutual funds.
Identify which rates are applicable for the different investments. For example, the short-term capital gains (STCG) tax on debt funds depends on the income tax slab you come under. However, equity funds are charged a flat STCG of 15%. So, compare the different tax rates and identify the net tax liability. This way, you can make the most tax efficient decision when you decide to sell.
3) Can you delay selling?
Imagine your son’s wedding is in a month’s time and you need Rs 25 lakh to finance the wedding. That’s a time bound financial expense. Similarly, you may have other expenses that have strict timelines. As a result, the only solution may be to sell your investments immediately to raise the money.
But what if the decision to sell is not time bound? Is it possible to delay the sale? Ask yourself this question because it can help you save tax. For example, by deciding to delay selling of a fund, you would attract LTCG instead of STCG. In most cases, LTCG tax rates are lower than STCG.
However, it's always best to look at the actual tax liability. For example, if you are selling a debt fund, the gains are taxable as per your income tax slab rate. The LTCG is taxable at either 10% flat or 20% with indexation. If you fall in the 5% tax bracket, then STCG would be preferable. But if you fall in the 20-30% tax brackets, then LTCG would be more tax-efficient.
4) Can you spread out your sale?
Another good option is to spread out the liquidation through options such as Systematic Withdrawal Plans (SWPs). An SWP allows investors to withdraw a specific amount of money at regular intervals. SWPs allow investors to access money when they need it so that they can meet their financial needs.
Now, it is possible to spread an SWP over financial years. For example, let's say you started a six-month SWP in January. Then, half the profits would be taxed in the financial year ending in March. The remaining would be taxed in the next financial year. While this may or may not help lower your final tax outgo, the tax payments can be spread out, thus earning you a temporary relief.
The above points help you identify the tax implications you need to consider when you make a sale. However, remember that these shouldn’t be the sole factors for you to consider when you sell an investment. For tips on when to sell, read here.
It can always be useful to have professional advice regarding your personal financial affairs. In the next article, let’s see how you can use wealth managers and financial advisors to your benefit.
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Why financial planning is importantIs earning money enough? No, it is not. Though the money you earn is important, if you don’t channel it into savings and use it to fulfil your financial goals, it doesn’t fulfil its purpose. Having sufficient corpus to meet your financial liabilities and having financial freedom is what is important. Financial freedom can be achieved if you plan your finances. Here is where financial planning comes into the picture. It is an imperative tool with which you can plan your finances, create the required investments and generate funds for meeting your financial goals. Though experts stress the importance of financial planning, many of you ignore it. Why? Don’t you realize the importance?If you don’t, here are some points which would help you see why financial planning is important - Why financial planning is important?Financial planning is important because of the various benefits it provides. If you have a well chalked-out financial plan you can not only handle your money efficiently, but also save for financial independence. Here are the benefits of financial planning and knowing them you would understand what makes it important – • You will have a contingency planThe first step of a financial plan is to have contingency funds. This fund helps you in meeting the financial strain faced in an unplanned contingency. Thus, when you develop a financial plan, you have provisions for meeting contingencies and your financial stability is not threatened. • It helps in budgetingA problem which many of you face very often is splurging through your monthly income. Either because of overspending or spending on unaffordable items, you blow a hole in your pockets which threatens your financial stability. This overspending and splurging can be avoided with a well-defined financial plan. Financial planning helps you create a planned budget. This budget gives you a guideline of your income and expenses and helps you save your income.• It gives a direction to your financial goalsHaving a financial plan means having a defined picture of your financial goals. Whether you want to save for your children’s future or for buying a house or for your retirement, financial planning gives you a sense of direction. You understand your financial goals and can save towards their fulfilment. • You become financially independentWhen you have planned your finances, you can meet any challenge life throws at you and deal with its financial implications. You wouldn’t have to depend on anyone to help you. Moreover, since all your goals would be planned in advance, you would have the security of knowing that there would be funds to fulfil your goals at the specified time. This brings in financial independence, something coveted by everyone. • You can earn tax benefitsWhen it comes to saving, there are many investment avenues which are tax-saving in nature. However, their tenure and returns vary. When you have a proper financial portfolio you know your goals and their tenure. Based on your financial goals you can pick those investment avenues which help you save tax and maximize your returns. Conclusion All in all, financial planning is important. If you want to live a stress-free life in terms of financial security, a well-defined financial plan is required. If you want to meet all your life’s goals head on, a financial plan is required. Moreover, the above benefits are also promised when you have a proper financial plan in place. So, if you have financial responsibilities and you want to achieve financial freedom, resort to financial planning.DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Financial planning helps you be prudent with your money and achieve your life targets. Although it is a simple process, it requires proper planning over a period of time. That’s because it comprises several steps. Each step has a particular objective. One misstep and your financial plan could be in tatters. It’s just like a house of cards. You remove one card and the whole house falls apart. Therefore, to create a successful financial plan you should follow each and every step in the correct order. Are you familiar with these steps? Do you know how to prepare a financial plan? Worry not, this piece will give you a step-by-step guide in preparing your first financial plan. Step 1 – Set your goalsIdentifying your goals at the start can give you a sense of direction. Unless you know why you should save, your savings will not hold much importance. So, whether it is buying that trendy car, building your own home or setting aside money for your daughter’s wedding, identify your financial goals.Step 2 – Plan your taxesTax-planning can ensure you have more money in your bank account. So, why do you want to give away your hard-earned money in tax? There are various tax-saving investment instruments available in the market. These instruments can give you tax exemption not only on the amount invested but also on the returns generated. Step 3 – Create an emergency fundAn emergency fund can bail you out in tough times. It gives you a financial cushion in case of an emergency. So, hold at least six months’ worth of your income in an easily liquid investment option. Liquid mutual funds can be ideal. Step 4 – Think insuranceYou should also think of getting a health and a life insurance plan. While a health plan can take care of your medical emergencies, a life insurance plan will give your family financial stability in your absence. Step 5 – InvestThis is when you think of investing your money. Know the risk involved, the returns you are likely to get and its tenure before you zero in on an investment option. Step 6 – Invest for each goal separatelyChoose separate investment options for your short-, medium- and long-term goals. You should not park all your money in one investment option. Different investment vehicles serve different needs. So, do some research, learn what each option’s forte is and then invest. For example, investing in equity or equity fund is not advisable if you want to achieve a short-term goal. Instead, invest in them for the long run. That’s because equity tends to be volatile over the short-term and generally steady in the long run. Therefore, your investments and goals should not obstruct each other. Step 7 – Review your plan from time to timeYour goals are dynamic and so are your financial requirements. Hence, your financial planning should be dynamic as well. So, review your financial plan periodically and make necessary changes to suit your requirement. So, is it difficult? No. You just need to follow a few steps to reap benefits of financial planning. It is just the lack of knowledge which makes the process seem difficult. Alternatively, you can choose to get professional help from a financial planner. IndiaNivesh’s financial planning team can always help you plan your finances and investments. What next?Financial planning. Tick. Next chapter will explain how budgeting is different from financial planning.DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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