Can I use systematic selling of equity funds to avoid paying a huge capital gains tax on long term gains? Is that feasible?
Answer 
Answer
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.