Skip to main content

Avoid Switching your portfolio too much

 

Avoid churning your portfolio too much

The taxman may classify the gains from investment as business income, which could be taxed at 30%

 

Rising equity markets have seen the return of the individual investor. Since January, while the BSE Sensitive Index or Sensex has risen 26 per cent, retail investor participation, based on client- based gross market turnover, has increased 62 per cent.

Law professional Sagar Shah has been trying to cash in on the boom as well. He has made 15 per cent profits on his portfolio comprising large and mid- cap stocks. In the past five years, Shah 35, held only five large- cap stocks but has now added mid- caps, in his portfolio.

Tax experts warn that the likes of Shah might find themselves in trouble when they file returns next year. High churning of portfolios increases the number of transactions. This, in turn, attracts capital gains tax. Those frequently buying and selling shares run the risk of being considered traders. So, the income from trading or business becomes business income, not income from investing. When investment income is considered business income, it is taxed at the highest slab rate (30 per cent).

Therefore, Shah's 15 per cent profit will become 10.50 per cent after a 30 per cent tax. While the taxman is unlikely to act on small gains, huge profits, say, ₹ 5- 10 lakh or above in a year, could be classified as business income and taxed accordingly, experts warn.

This is provided the shares are held as stock in trade, instead of investment, and valued as such. The other determining factors are the frequency of transaction and intention for which the activity is carried out, that is, to earn dividend or make profit. There is no fixed rule for distinguishing business income from investment income. It might vary from case to case, and on the number of transactions or amount of capital gains made. A lot depends on the sole discretion of the assessing officer looking into your case.

However, a Central Board of Direct Taxes (CBDT) circular dated June 15, 2007, says: "The substantial nature of transactions, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions.

Ordinarily, the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/ adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend etc. Then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt." There are higher chances of portfolio churn and higher tax liability when investors take professional help to manage their money during market boom such as portfolio management services. Every portfolio management company has a defined, unique style of investing, varying with different schemes. Although such firms cannot guarantee returns, they churn portfolios that lead to higher tax incidence.

Loss of business income can be set off only with gains from other businesses, if any. Or, with income from other source. If one cannot set off the business loss in one financial year, then s/ he can carry forward the same to the next seven financial years

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund
      2. Franklin India Smaller Companies

E. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Popular posts from this blog

Birla Sun Life Mutual Fund Launches Birla Sun Life NIFTY ETF

Birla Sun Life has launched a new fund namely, Birla Sun Life Nifty ETF, an open ended exchange traded fund. The new fund will be open for subscription from 4th July to 18th July 2011, at an offer price of Rs 10 per unit. The investment objective of the scheme is to generate returns that closely correspond to the total returns of securities as represented by S&P CNX Nifty, subject to tracking errors. No exit load will be charged under the scheme. The performance of the scheme will be benchmarked against S&P CNX Nifty and will be managed by Satyabrata Mohanty.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   1) DSP BlackRock Mutual Funds: http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html   2) Reliance Mutual Funds: http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html   3) Birla Sunlife Mutual Funds: http://prajnacapital.blogspot.com/2011/...
Read more

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...
Read more

Mutual Fund Reivew: Birla Sun Life Asset Allocation Conservative

Birla Sun Life Asset Allocation Conservative has numbers on its side to prove its credibility… Don't be surprised to find this Fund of Funds ( FoF ) in our recommendations. It has earned its place. And despite the difference in the structure of the product, there is no arguing with the numbers.   Of the total 6 years of its existence, the fund has been among the top 10 funds in its category in four of them. Last year it put up an average show and the only year it underperformed its peers was in 2008.   One aspect to look at when investing in an FoF is the expense ratio. The expense ratio of an FoF is capped at a lower limit of 0.75 per cent (2.50% for an actively managed fund). However, the FoF not only has its own expense (though lower) but even the expense ratio of the fund it is investing into. Fortunately, the fund manager takes that into account. "Expense is one of the important criteria used for fund selection and is the main reason for our investment in BSL Ind...
Read more

Short-Term Bond Funds

These are schemes that invest in fixed income instruments of short durations. Short-term bond funds with less than one year duration are good investment options provided you have a one-year investment horizon. Lower average maturity of the fund ensures that the fund NAV is not hit much when short-term interest rates move up. We expect the RBI to hike the policy rates by 50 to 75 basis points in this calendar year. That makes it a bit tricky for short-term bond fund investors. Check the average maturity and exit load before you invest in a short-term bond fund. As a rule of thumb, the average maturity should be less than your investment time frame. Some funds do charge an exit load if you log out early. To avoid such a cut in the returns earned, it is better to check at what threshold of time the fund charges an exit load. The funds have a wide range of 'exit load' thresholds. Some charge an exit load if you were to redeem units within 90 days, while there are some that let ...
Read more

Short-Term Investment Options in Mutual Funds

Mutual funds offer liquid funds and ultra short term funds in the debt category, which are suitable for short investment periods. Ultra short-term funds were earlier known as liquid plus funds. Liquid funds invest in money market instruments with a maturity of 91 days or less. However, there are no such restrictions for ultra short-term funds. Who should invest in these? These are open-ended schemes. Investors with a short investment horizon or with surplus cash and low risk appetite should look at these. These could include corporate as well as retail investors. Those interested in staying invested for less than 15 days can opt for liquid funds. Retail investors who want to remain invested for two-four months, can look at ultra short-term funds. The short duration for both liquid and ultra short-term funds shields them from any interest rate volatility.   What kind of returns do they offer? In terms of an investment period less than 15 days, these funds are comparable to a ba...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now