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Don’t Let Taxes Dictate Your Investment Decision

Making investment decisions solely based on Tax implications is a sure way to disaster.

  1. Buying Real Estate

Ramesh wanted to save tax, so somebody suggested to buy a Flat so that he can save tax on his housing loan interest.
Ramesh went ahead and bought a flat. It saved him some tax (essentially it just brought down his cost of borrowing). But then he required funds for his daughter’s education after 2 years. So he decided to sell his flat. It was difficult as Real Estate is illiquid and the property rates did not appreciate much.
This is a classic example of what happens when you base your investment decision solely on tax implications.

Rather when you are making any investment decision focus on the following:
1. Your Goals
2. Merits and demerits of that particular investment
3. Risk to Reward ratio

2. Avoid Redeeming Mutual Funds 

There is no sense in churning your MF or Equity portfolio for the sake of it. But sometimes it may be advisable to exit some funds for reasons such as –
a. Funds not qualifying the set criterion,
b. Having better opportunities with other funds
c. Or having some goals for which you will require funds.

Ramesh was advised to liquidate some of his mutual funds as they were not matching expectations and not adhering to the criterion of some investment parameters. But he kept on postponing the decision as he was reluctant to pay capital gain tax.  As years passed, his fund did not grow as expected, lowering his portfolio return.

Here it is important to understand that Capital Gain Tax is levied on the gains and not on the principal so for example if you got a return of 12 % and you pay 10% capital gain tax on your gain, It just means that your return is reduced by 1.2 %.

So, it is advisable to look at the big picture and then make the decision.

There is a saying, “Don’t be penny-wise and pound-foolish.” 

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