What is the most tax-efficient way to liquidate your funds?
Premium- Investments in equity and debt mutual funds have different tax implications
I have units of the following funds - ICICI Prudential Bluechip, Canara Robeco Flexicap, SBI Focused Equity, Axis Bluechip, ABSL Focused Equity, and HDFC Corporate Bond worth ₹75 lakh. I need to liquidate around ₹50 lakh in the next six months to purchase a plot of land. What is the appropriate and tax-efficient strategy for this?
— Name withheld on request
Your investments in equity and debt mutual funds have different tax implications. The long-term capital gain in equity funds (over ₹1 lakh) will be taxed at 10% without indexation, and for the debt mutual funds, it will be taxed at 20% with indexation. Long-term capital gain tax is applicable after three years of investment for debt mutual funds whereas for equity funds, it is after one year. A lot depends on your other near-term and long-term requirements while working on the withdrawal plan.
You should check the capital gains for each fund before deciding which one to withdraw. If the capital gain tax is low for certain funds then you may opt for those funds to avoid paying higher taxes at this point. Considering the asset class of the funds, their recent performance and current environment, you can look at redeeming from HDFC Corporate Bond, ABSL Focused Equity and Axis Bluechip. If there is a shortfall, then partially withdraw from the other equity funds. However, the first thing to check is which fund has relatively less long-term capital gain.
Another important thing to do is to gradually start withdrawing from equity funds for the coming six months instead of waiting and withdrawing in one go. The monthly withdrawal will help you to de-risk the required amount over a period and also help you avoid erosion of accumulated amount if the stock market corrects when you need the entire money. You can keep parking the withdrawn money from equity funds in your savings account or liquid funds as the risk on these investments is very low compared to equity for a short duration like six months.
Harshad Chetanwala is co-Founder at MyWealthGrowth.com.