I have the following fund units – ICICI Prudential Bluechip, Canara Robeco Flexicap, SBI Focused Equity, Axis Bluechip, ABSL Focused Equity, and HDFC Corporate Bond Prices 75 lakhs. I need to liquidate around 50 lakhs in the next six months to buy a plot of land. What is an appropriate and tax-efficient strategy for this?
– Name withheld on request
Your investments in equity and debt mutual funds have different tax implications. Long Term Capital Gains (Over.) in Equity Funds 1 lakh) will be taxed at 10% without indexation, and 20% with indexation for debt mutual funds. Long term capital gains tax is levied after three years of investment in debt mutual funds, while it is applicable after one year in equity funds. A lot depends on your other near-term and long-term requirements while working on the withdrawal plan.
You should examine the capital gains for each fund before deciding which fund to withdraw. If capital gains tax is lower for certain funds, you can opt for those funds to avoid paying higher taxes at this point of time. Considering the asset class of the fund, their recent performance and the current environment, you can consider redeeming from HDFC Corporate Bond, ABSL Focused Equity and Axis Bluechip. If there is a shortfall, partially withdraw from other equity funds. However, one has to first see which fund has relatively low long term capital gains.
Another important point is to start with a gradual withdrawal from equity funds for the coming six months instead of waiting and withdrawing all at once. Monthly withdrawal will help you to de-risk the required amount over a period and will also help you avoid erosion of accumulated amount if the stock market corrects when you need the entire money. You can keep the money withdrawn from equity funds in your savings account or liquid funds as the risk on these investments is much lower as compared to equity for a short tenure of six months.
Harshad Chetanwala is the co-founder of MyWealthGrowth.com.