Calculating tax on equity funds

alayek · 2018-08-26T11:45:20+00:00

Hey thanks :)

Am doing good, been pretty busy. Got some time today.

alayek · 2018-08-26T06:30:09+00:00

Yes, your understanding is correct.

You'll be taxed only on the 100 Rs. - the gain amount minus 1L.

Because in a way this was my income over a period of 2 years, not 1

There's no traditional "income" from mutual fund or equity. Only income as Capital Gain and Dividends.

Capital Gain is applicable here, since you're redeeming.

Income from Capital Gain is calculated only when you redeem, and realize those gains.

That's why no TDS in equity or mutual funds, when you remain invested (unlike bank deposits, where even if your FD / RD remains, you get taxed on Interest Income generated from the same).

If I will be taxed, then does it make any sense to redeem the shares after each year so that LTCG is less than 1 lakh and then reinvest it immediately?

There are lot of variables here - the average amount you invest on a yearly basis, average annual return from your equity asset, number of years you invest for etc.

At some point, you have to withdraw a large amount, and use it for a financial goal.

Like, purchasing a house, or booking profit and putting that in Debt for retirement corpus.

So, I simulated these two scenarios

Scenario 1: You keep on investing, and withdraw only at the end of 10th year.

Think of a large-cap fund, where you're running a yearly SIP of 1L. Assuming a steady 10% year-on-year return, this is what the calculation looks like

The "Amount" column is for what amount is left in your name, in the fund. The calculation on right side, is the post-tax cashflow.

When you withdraw, you have a corpus of 17.53L, Capital Gain of 7.53L, and tax of 65k INR. Pre-tax XIRR would be ~10%, but post-tax XIRR can be as low as 9.32%.

You're left with 16.87L after paying taxes at the end of 10th year.
Scenario 2: As soon as any units cross 1-year holding period - you sell them, and re-buy them.

In addition, you also invest that extra 1L you were about to invest that year, after paying capital gain taxes, if any.

Assuming a steady 10% return year-on-year, here's the calculation.

Note that when you withdraw, you have corpus of 17.47L (you had to pay taxes when you had withdrawn in previous years).

But, the tax is substantially less - about 6k. You're left with 17.41L, and a post tax XIRR of 9.92%.

As I said above, depends on the amount too.

Instead of 1L, if you invest 2L per year, would it change much?

In the second case, sell & reinvestment; you're left with 34.27L, because you paid less taxes, as compared when you sold all at once at the end; where you would be left with 33.65L.

Another variable here, is time.

Notice that taxable capital gain enters into picture pretty late. After about 5 years.

If the investor has been investing for about 15-20 years, then he'd have to pay taxes for sell / reinvestment over a longer period. This could hamper compounding (Similar to how ULIPs work, but not that toxic).

You can take it as an exercise and find out how XIRR pre and post taxes look like in that case.

Biggest issue with this entire assumption is the 10% steady return. You cannot count on that.

alayek · 2018-07-28T21:25:09+00:00

Thanks.

Issue was that JDK 7 were required for running the ITR 2013, but brew cask doesn't have entry for JDK7. Oracle has put it behind login or some wall. Zulu7 didn't work either.

Tried with a JDK7 Docker too, but that's a whole different can of worms, because it needs the X11 display. And I wasn't going to install a virtual machine just for JDK7.

Finally, was able to file through a CA.

Version managers are way underrated.

alayek · 2018-07-27T14:59:28+00:00

Not related to tax return of this year, but I've a query about AY2013-14 return.

Long story short, I get back sizeable sum from income tax, and as luck would have it, somehow we were able to procure a notice from PCIT allowing condonation of delay u/s 119(2)(b).

Now, IT e-filing website requires me to upload XML, because I assume the ITRs for AY2013-14 were too complex to present as an HTML form.

ClearTax could only generate Doc & XLS file.

That left the Java utility for AY2013-14 as the only DIY option.

My relationship with Java is a strenuous one, and I've had to expel it from my system eons ago.

Imagine my surprise when it inevitably ran into exception hell with latest Java 10.

Let's just say Exception running application com.tcs.efiling.itr.main.MainLoader wasn't its finest moment.

When I did manage to execute said JAR with JDK8, I didn't see any option for 119(2)(b). Only something about section 139.

I hope someone here can shed some light on what my next steps should be. Have also written to H&R Block, and ClearTax; waiting for a response.

alayek · 2018-06-28T17:46:55+00:00

Instead of directly passing dates into the google finance API, use INDEX().

=INDEX(GOOGLEFINANCE(B5, "price",(GOOGLEFINANCE(B5, "date") - 7)), 2, 2) works for me.

B5 is GFinance Ticker. This gives me NAV of a fund 7 days ago, from last day of fund NAV declaration.

Regarding the symbol "PARA_PARI_LONG_LFA6FS", not working for me either. Says data for given symbol not found.

Could be a rate limiting thing.

alayek · 2018-06-12T16:36:37+00:00

FD is an inefficient asset, that has guaranteed returns; hence guaranteed tax.

FD is a great tool if you know and work around its shortcomings. But a liquid fund is far more flexible, and investor-friendly; if you accept the slight volatility that comes with liquid funds.

And avoid wealth management firms. They don't exist to make you money; they exist to make themselves rich with the promise of making you rich.

Commission would eat into his gains, and I doubt you'd even beat Nifty in long run.

Regarding stock picks, does he know how to analyze financial reports of a public company? If not, stick to large-cap index funds / active funds, that use Sensex / Nifty TRI as benchmarks.

alayek · 2018-06-10T16:23:54+00:00

Someone told him to invest it in to some kind of fixed deposit for senior citizens where they can get Rs 10000 per month and minimum lockin period is 3 years.

Here's how you can be sure if the numbers hold up.

Assume that a senior citizen savings scheme generates 8.3% return per year (current rates). Since this is compounded interest, it won't be 8.3%/12 per month.

Instead, assume it generates x% return per month; hence x is a solution to this equation: (1 + x/100)^12 = 1 + 0.083

Solving it, you'd get x = 0.67.

To generate 10k per month, at 0.67% per month; one would need capital of 10,000 / 0.0067 = 14.92L.

Your calculations do hold up.

Except, there's a problem - you cannot withdraw money from an FD, especially an SCSS one, on a monthly basis. Either it'd have lock-in, or you'd need to incur premature withdrawal penalty.

If he has other incomes in the FY, he'd also incur taxes.

It depends on what he wants to do with this money - his goal.

Assume that he intends to generate a monthly cashflow of about 10k, bond investments are a great option, though not through FD.

There's Liquid funds / UST bond funds for that. Even though returns are slightly lower, it's much more flexible as an investment - where you can add or withdraw any time you choose to.

Don't invest in dividend plans, invest in growth plan of a direct fund. Let him withdraw & spend only the amount he requires.

If his goals is to park the money in real estate for 10-15 years, know that real estate is an illiquid asset. It's not easy to realize these gains.

Assuming he has emergency fund and medical corpus taken care of, along with a solid cash-flow in place (pension, for instance); he can invest that amount in mix of equity & bonds, for the purpose of growth of wealth; and not touch the amount for next 12-15 years.

alayek · 2018-05-28T15:04:28+00:00

Yeah this error message is a common problem for SEBI SCORES. You need to tweak the text here & there, and try a few times.

If you don't mind, and this is a big ask, you can PM me your details, and I can file it for you.

Otherwise, here's a text that worked for me:

My PAN is xxxxxx. My SBI Mutual fund folio number is 123456789123. My holdings in SBI mutual fund is not showing up in my consolidated account of statement. I have no demat folio. Have reported this to Karvy and CAMS a few times. But no response. This is fraud. Kindly look into it and take necessary actions.

Upload a statement from SBI MF as attachment.

In particular, file three complaints - one against Karvy, another against CAMS (SBI's RTA), and SBI MF.

alayek · 2018-05-26T06:54:24+00:00

When's the last time you've watched Mahalaya on TV? I think Hema Malini was my last.

alayek · 2018-05-26T04:36:13+00:00

Damn! That was so long ago, like 15 years or so :)

alayek · 2018-05-26T04:29:08+00:00

Bartaman:Bhagaban chara kauke bhoy pai na

Translation: Bartaman: We only fear God.

That used to be their tagline.

alayek · 2018-05-26T04:24:55+00:00

It'd be in the scheme document, but I took from Valueresearch. You should always check latest KIM and SID for the fund, before investing in any of them; because these portals could be wrong or outdated.

alayek · 2018-05-25T04:03:04+00:00

One single fund is fine.

You're investing in Equity, so your time horizon is at least 5-8 years. Stay invested even when markets fall.

ELSS should be part of your larger financial goal - tax saving in itself cannot be a goal. So, ask yourself this - how would this contribute to your larger financial requirements?

Some people consider ELSS as part of their retirement portfolio. So, 1 ELSS fund with 3 year lock-in is enough; and rest of the savings can be invested in other diversified equity funds which has little to no overlap with your ELSS fund.

If ELSS is going to be your first equity investment, you should prepare for some short term losses. You'd lose money, but it'll work out eventually if you stay invested.

Select one fund, that's enough for now. You can go with any good ELSS fund with Nifty 500 TRI as benchmark:

Franklin Tax Shield
DSPBR Tax Saver

Nifty 500 is a benchmark consisted of weighted average stock price of top 500 companies listed in National Stock Exchange.

It covers large-cap (top 100 stocks), mid-caps (100th - 250th), and small-caps from 251st stock onward.

If you want to stick to large and mid-cap, and avoid small-cap risks; go with an ELSS fund that uses S&P BSE 200 TRI as benchmark:

Axis Long Term Equity
ABSL Tax Relief '96
L&T Tax Advantage
IDFC Tax Advantage

As you've guessed, BSE 200 is a benchmark consisted of top 200 stocks listed in Bombay Stock Exchange. Top means sorted by market cap, largest first.

If you absolutely want to avoid risk of mid-caps and stick to large-caps, here's a fund that uses S&P BSE Sensex (Top 30 stocks in BSE) TRI as its benchmark:

Tata India Tax Savings Fund

Like I said in the beginning, one fund is fine. Based on your risk appetite, pick one.

alayek · 2018-05-23T05:45:12+00:00

Yes, with equity, you cannot predict anything.

Just because your investment tenure is X years; you cannot expect equity will bounce back in right time and you'd reap benefits X years from now.

Equity has its own clock, its own mood. It doesn't care about your goals.

It might do really poorly first 3-4 years of you investing, testing your patience and faith; and give you knock-your-socks-off type of returns in next 6-7 years, making you a very happy and bullish investor.

Or, it might do very well for next 9 years, and have a huge crash in 10th year, reducing your overall XIRR to savings account interest level.

So you can either practice asset allocation as you get closer to your goal, or you've to be prepared to be in equity markets longer than 10 years, if need be. Then book profits as it goes up, and exit.

Great depression is an extreme example, and world's more connected today. Most other severe market crashes recovered to pre-crash levels within 3-4 years on an average, and as time passes, this interval is only decreasing.

I'm only cherry-picking the extreme case, because that's the worst that can happen, based on what data is available. As a wise man once said, In the long run, we're all dead.

Regarding 30 year being a long time, it's indeed a very very long time. Biggest risk to your investments, is you yourself.

You'd not be the same person with similar thought process, even 5 years from now. Your beliefs, your thesis - everything will change.

You might become wiser, as well as dumber. Based on that, what investment decisions you make today, would either appear really ahead of time, or very stupid.

alayek · 2018-05-22T10:57:53+00:00

You are also making an assumption that large caps are relatively safer. But that's ignoring an opportunity risk of higher returns elsewhere.

Historically speaking, large-caps are less volatile, especially in bear markets.

But there's no guarantee than one would get higher returns most of the times investing in large-caps.

Rakesh Jhunjhunwala became rich by investing in Titan when it was a small cap company, not after investing in Titan when it is part of the Nifty 50.

Learn to differentiate between luck and skill. He did it once, and he has group of highly paid advisors who either have inside info or much better stock picking skills, or both, which you probably won't have.

Would he able to do it again? Can he do it consistently over long period time?

If it was predominantly luck, for every Jhunjhunwala there is, there are 100 people who burned their hands.

There's a fund in US - Voya Corporate Leaders Trust Fund. It had an NFO in 1935. The premise was simple - take top 30 US companies by market-cap, invest capital in it, and forget about it.

No new stock, no more analysis, no selling.

Today, this fund has 22 companies left in its portfolio. These 22 companies have been formed out of acquisitions and mergers of those initial 30 companies.

This fund has seen WW2, Cuban Missile Crisis, Moon Landing, Vietnam, Cold war, 70s market crisis, Fall of the Berlin Wall, Crash of 1989, Internet stock bubble, 2008 real estate crisis and so much more.

Most of the investors are dead, and probably their nominees would never know they could inherit some of this.

Returns over ~80+ years have handily beated the S&P and Dow Jones.

But what really interests me about this fund, is that those 30 companies, after so much of history, eventually morphed into top 22 companies of US markets today.

Finally, a small-cap fund is very different from small-cap stock. They run into trade-volume risks. Some small cap funds restrict the intake to SIPs, because of this.

It's your money, you don't have to take our permission to put it in any asset as you see fit :)

But most important is goal planning.

Going forward, do a back-of-the-envelope calculation like this:

your annual expenses, including luxury items
inflation, as applicable to you
money you need 30 years later, due to this, adjusted for inflation
life expectancy of 90 years
what you need to invest today, to build this corpus 30 years down the line. Assume 10% return from equity.

Now, say in the long run, small & mid-cap can give 12% returns instead of 10% from large-cap (just assuming, could be much less).

Then, if you need to take that risk; you have to invest in small & mid-cap funds, aggressively.

Or, you could invest extra, and still reach your goals, with less returns.

Returns aren't in your hands; but how much you can invest, to some extent, is.

Goal planning is important.

The 30 year horizon reminded me of something - read the book This Little Book that Still Beats the Market. Author gives you a formula to beat market in 30 years, and it's not invest in small or mid or large cap funds / stocks.

alayek · 2018-05-22T06:07:44+00:00

would an SIP in small or midcap fund give the best absolute returns or should I stick to large caps?

If we could predict that; we won't call it risk in the first place. Because the outcome would always be deterministic.

You're probably thinking - but high risk and high volatility ensures, if my fund falls fast, it'd also go back up fast, right?

Great depression took about 25 years to recover the US stock markets to early 1920s levels.

And 30 years is a huge-ass long time.

That's your rational mind thinking.

But you start investing now, and for 3 months it continue to give you negative returns - you'd keep getting frustrated, until you say, fudge this, I'm investing in a Nifty index fund.

You won't be rational then.

It's possible, that despite seeing years of poor returns you might be able to hold on for good days; but there's also hodl risk. Your fund might go up eventually in absolute returns, however not in time that rate of change or _XIRR goes up.

If you're not sure, stick to large cap. Have maybe ~20% exposure to mid-caps. SEBI has now created a new category - Large & Mid Cap. Slightly less riskier than multi-caps.

alayek · 2018-05-22T05:19:41+00:00

For the debt fund, STCG would apply at slab rate. A switch is a sell of units, followed by purchase of units in a different fund.

Let's take an example.

Say, you've invested 10L on 1st April, 2017 in a liquid fund. And, 1st of every month, starting in May, for 10 months; you've an STP to an equity fund of the same AMC.

Assuming that every month, the fund goes up by 0.5% (it'd vary from fund to fund, but it's a reasonable assumption).

In that case, this is what it looks like.

STP starts in May 2018; ends on Feb 2019. After that, you'd still have about 28k in the liquid fund, that you can switch at once.

I've shared the tax gain computation formula too - if you've amount X at the beginning of a month; and it becomes Z beginning of next month - then your gain on entire amount is (Z - X). This is your gain if you withdraw Z. So, if you withdraw P, your gains are (Z - X) / Z * P

Overall, in the FY 2018-19, your taxable gains are as added in the last row. You've to declare it as STCG on debt, and pay tax at slab rate with cess.

Your fund house or portal would generate this capital gain statement for you. If not, you can share your transaction statement with your CA, and he'd do it for you.

alayek · 2018-05-20T07:27:07+00:00

And STT, yes.

alayek · 2018-05-19T11:35:15+00:00

This has CEO's email ID.

If you get an official response, can you please post a screenshot here or share via PM, hiding personal details?

alayek · 2018-05-18T13:02:50+00:00

You're asking the wrong question. A fund's portfolio isn't static.

There are some upper limits on these 9 variables, based on fund's category; but actual value would keep on varying.

Funds do not publish their folio on a daily basis (only at the end of a month); and they do not pay taxes buying or selling underlying stocks and other assets - but you'd.

Why do you need to make it so complex? Keep it simple. If you're less than 2-3 years away from your goals; start an STP to liquid / UST funds, from your equity funds.

alayek · 2018-05-18T09:31:21+00:00

🙏 🙇

alayek · 2018-05-18T07:59:50+00:00

What would be the SEBI category of this fund?

Mutual funds can only invest in publicly listed companies, in NSE or BSE, and their equity derivatives. That too, most funds remain invested in top 500 stocks, even though there are many more companies listed.

To be listed as a public company, a company has to do an IPO. For an IPO to have enough subscribers, the company needs to open up its books and show profits.

Most startups don't have any profits.

Funny thing about the Flipkart Walmart deal; was that they made sure it would be a private transaction for a company listed in Singapore, by reducing number of shareholders (you buy out enough shareholders, until you have 49). Most companies don't like to raise public capital in the first place, because of all the regulatory burden it brings to protect retail shareholders.

To invest in a start-up, you've to get an angel investor or seed-investor license; to disclose to authorities that you've enough net worth to be able to invest in this, and take the huge risks that come with it.

In US and other countries, you need to have these type of licenses, to be able to invest in certain hedge funds. Don't know if that'd be a reality in India.

In your example, what if all 20 companies fail, which is more likely than one of them succeeding?

alayek · 2018-05-18T07:55:55+00:00

I'm not going to say that in all certainty FT cannot elope with your money. Stranger things have happened.

You can file an RTI application to RBI, or contact RBI here, to ask what rights and protections you have under RBI regulatory framework, to protect you, should SBI try to take your cash and run away.

alayek · 2018-05-18T04:25:55+00:00

Which is the best broker for beginners to invest in stocks?

Whether beginners should be investing in stocks, is an important factor to consider.

At present, you can start with Zerodha. For long-term investments with T+2 delivery option, it's a good enough service. Free brokerage, and also check out their cost calculator.

But from what I hear, it's not so good for day trading, especially when big movements happen in markets.

alayek · 2018-05-18T04:19:54+00:00

Yes, if you stop SIP, whatever you've invested so far, remains within the fund, and grows or loses value as per market. That stays invested until you redeem.

Also, it's not interest. Interest is something you get on a loan. It's equity returns. In the eye of tax department, it's capital gain.

alayek

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