Sadagopan is employed with an MNC for the past 20 years with a taxable salary income of more than 1 crore. He has a son and a daughter. He has been regularly investing in SIPs for various goals. His daughter has completed her under graduation and wants to do her Masters in Australia. He wants to sell the MF units and fund for the foreign education. Since he is already in the higher tax bracket, selling these units would attract capital gains tax. Is there a way he can avoid this?
Mutual fund investments are popular among salaried individuals and it helps one plan financial goals in a systematic, and consistent manner. When your reach a point where the funds are required to be withdrawn for the intended goal, it hurts when a sizeable portion is culled out for the tax liability ! When the goal is for buying a house, the Income tax law allows an exemption u/s 54F of the Income Tax Act. But if it’s for funding a child’s education, there is no such tax saving avenue.
Tax planning is a key financial management as it helps one to legally avoid / reduce tax liability and thereby improving cashflows. Tax planning cannot be done in a hurry. One needs to plan well in advance, explore avenues and take necessary professional assistance to do it the right way.
GIFTING AS A TAX PLANNING TOOL:
Gifting is an important tax planning tool under the Income Tax Act. If used wisely, one can save a huge amount of money. Normally, fair market value of the movable property (like MF units) received as gift is taxable as income in the hands of the receiver. But when the gift is received from a relative, it is not chargeable to tax (Sec 56(2)(x))
Related posts: Gifting under income tax law & it’s impact on the receiver
How can Sadagopan plan his taxes?
In Sadagopan’s case, he can gift the MF units to his daughter and the entire gift will tax free in her hands. When the MF units are redeemed from her portfolio, it will be taxable as Capital gains in her hands.
Food for thought:
Capital gains are taxed at flat rates. Why go through the pain of transfer and then redeem it, when the tax rates are the same for the giver and receiver? . Tax liability includes the Surcharge and Cess Components. Since Sadagopan is in a high paying job, his salary income itself would have crossed the surcharge limits and any additional tax liability will also attract surcharge at the rate of 15%.
Furthermore, if the SIPs were made in debt funds, upto Rs. 12 Lacs of capital gains can even be tax free (Sec 87A rebate)
How Can We Help You?
With the availability of online facilities and convenience, many individuals have started investing in shares and mutual funds. While it’s a great trend, one must also be aware of the exit modes and the tax implications for these asset classes. There are a lot of legal tax planning avenues, which can be carefully crafted for your needs. Reach out to us and we shall help you plan your taxes.
Contact: +91 73050 56628 / frontoffice@onesourcevault.com
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