The markets continue to be at their volatile best and investors who chose to book their profits must be breathing easy. But these investors are faced with a new dilemma, “what do we do now?” You have made a prudent choice by booking some profits, you have profited from the rally, so what should you do next?
The most logical option would be to realign your portfolio. Rising markets often radically modify your asset allocation. Investors end up being overweight in asset classes which may not match their risk profiles. Secondly there could be something like a dream car or that holiday which you have long desired for. This is probably the best time to go for it! Having said that, let’s not ignore that section of investors, which is looking for sound investment avenues even at this stage.
This is the season for tax planning and it would make a lot of sense to consider some tax savings instruments. Equity linked savings schemes (ELSS) and National Savings Certificates (NSC) in particular stand out as feasible options. ELSS is possibly the only investment avenue that couples market linked returns with the tax benefits. Equity linked savings schemes are equity oriented mutual fund schemes with a 3-Yr lock-in period. Investors can invest upto Rs 10,000 per annum and claim tax benefits on the same under Section 88 of the Income Tax Act. On a flip side exiting the investments before the stipulated period would involve losing the tax benefits.
National Savings Certificates (NSC) also offer tax benefits under Section 88 and Section 80-L. With an interest rate of 8% per annum, NSC rates amongst one of the most attractive options. The interest earned on the original investment qualifies for the reinvestment benefit under Section 88 thereby necessitating a lower investment in the next year. NSC has an edge over comparable avenues like PPF since the rate of returns is locked; thereby insulating the investor should interest rates decline. Investors could consider investing a part of their proceeds in the aforesaid avenues, thereby ensuring a reduction in their tax liability and tackling the problem of idle cash simultaneously.
One much ignored aspect of booking profits is the capital gains tax. Investors are liable to pay long-term / short-term capital gains tax depending on the duration for which the investments were held. While tax savings bonds are available aplenty, investors could also utilise the opportunity to set off their tax liability against the purchase of a self-occupied house property. If you are an investor with a substantial long-term capital gains tax liability and are looking for accommodation, this is probably the best time to buy one!
Home loans are being offered at rock bottom rates and intense competition among housing finance companies has ensured that loan seekers are being offered the best possible deals.
Section 54F of the Income Tax Act permits the assessee to set off his/her long-term capital gains tax liability, if the proceeds are used to buy a self occupied house property. Obviously the assessee is required to fulfill conditions like the house property must be purchased within a period of two years from the date of sale of the mutual fund units, the new residential property should be retained for a period of not less than three years and many more. Availing a home loan to acquire the property would imply further tax benefits. Getting the long-term capital gains tax liability waived and adding some tax sops from the home loans to your kitty is equivalent to cutting your cake and eating it too!
Booking profits is half the work done, now its time to gainfully manage the profits. There are a plethora of opportunities available to the investors. All he needs to do is make a smart choice and pick the one which suits him the best.
Personalfn can assist you in planning your taxes. To avail of our services, please call us at 022 – 5599 1234 or fill in a brief form here and we will get in touch with you.
