In our previous illustration we assumed that the entire units purchased were sold on the completion of 1 year. But when tax is imposed on LTCG, investors are going to phase out their selling. When you sell partial units, a major chunk of your redemption is in the form of capital redemption and only a small portion is in the form of LTCG. Let us understand this with an illustration. Let us also assume that the limit of Rs.100,000 has already been utilized so LTCG on equity funds is now taxable…

Particulars of the Equity Fund

All the units are sold

Partial units are sold

Name of the Fund

XYZ Equity Fund (Growth)

XYZ Equity Fund (Growth)

NAV on 01st Jan 2018

Rs.10

Rs.10

NAV on 01st Mar 2019

Rs.12

Rs.12

Return on investment

20%

20%

Number of Units owned

10,000 units

10,000 units

Number of Units sold

10,000 units

2,000 units

Redemption Value

Rs.120,000

Rs.24,000

Profit on sale of units

Rs.20,000

Rs.4,000

Tax payable on LTCT at 10.4%

Rs.2,080

Rs.416

What we are doing in the 2nd case is that instead of selling all the units, we are only selling partial units. As a result, part of the money comes to you as principal and part as LTCG. Remember, the benefit of Rs.1 lakh exemption is available for each financial year, so instead of withdrawing the profit in lump sum in a single year, look to take it out in a phased manner to save tax. Thus by phasing your withdrawal in the second case, you have substantially reduced your tax outgo on LTCG. The fiscal year ends on March 31st 2019. On April 01st you can sell the balance units in the second instance and pay not tax as you are within the Rs.1 lakh limit. That is how phasing your selling can help you.