Frequent Partial MF Withdrawals Negate Compounding Benefits

Niranjan Kumar, email

I have been investing Rs 10,000 per month in a systematic investment plan (SIP) for the last two years. Till now, I have invested Rs 2.40 lakh and the investment tenure is five years. If I withdraw Rs 1.20 lakh from my investment now and reinvest the amount in this scheme or use it for some other financial obligation, will I be able to take benefit of the long-term capital gains (LTCG) exemption of Rs 1.25 per annum?

If you withdraw `1.20 lakh from your investment now, you can avail of the LTCG exemption benefit of `1.25 lakh per annum. However, you will also lose out on the benefit of compounding, which generates significant wealth if the investment is held for over 10 years, as compounding is a wealth multiplier in the long run.

Partial withdrawals and reinvesting in the scheme are not advisable, as mutual fund investments yield maximum benefits when held for a longer period. Frequent withdrawals or switching between different schemes will also reduce your overall return in the long run due to taxes, besides preventing you from the benefit of compounding. It’s best not to make partial withdrawals from your investment.

Suhel Chander, CFP® Handholding Financials

Kumud Sharma, email

I bought a house two years ago. It is still under construction. The builder said that he will hand it over by this year-end. Will there be different tax implications if I sell it now on an as-is-where-is basis or if I sell it to a buyer after taking the possession myself?

For a property to qualify as a long-term capital asset, it must be held for more than 24 months. If you sell an under-construction property before 24 months, it will be considered as a short-term capital asset, and the gains will be taxed as short-term capital gains (STCG) at your applicable income tax slab rate.

The holding period for an under-construction property is calculated from the date of allotment or the date of agreement to sell, and not from the date of possession.

LTCG on real estate are taxed at 12.5 per cent without indexation, or 20 per cent with indexation benefits. Sections 54 and 54F of the Income-tax Act, 1961, provide exemptions on LTCG if the gains are reinvested in a residential property. The new property must be purchased within one year before, or two years after the sale of the original property, or, constructed within three years from the date of sale. If you are unable to reinvest the capital gains from the property sale before the due date of filing of your income tax return, you can deposit the unutilised amount in a Capital Gains Account Scheme (CGAS) to avail of the exemption. It is applicable in case of LTCG.

Hina Shah, CFP® Luhem wealth

Shyamal Das, email

I am 30 years old and will be moving abroad next month for a new job. My employer will provide me with a health insurance as part of the agreement. I also have an existing health cover in India. Since I will be relocating, is it worth continuing my policy in India, or should I discontinue it?

Since you will be moving abroad and will be covered by your employer’s health insurance, continuing your Indian health insurance policy may not be necessary in the short term.

However, if you plan to return to India in the future, then continuing with your health policy in India will be beneficial, as getting a new policy later could involve higher premiums or fresh medical underwriting. Also, there is no guarantee that you will be eligible for getting a health insurance policy later on if you develop adverse health conditions. Hence, it might make sense to continue with your existing health insurance policy even if there is a slight chance that you will return to India in the future.

If your policy has already completed waiting periods for pre-existing conditions, letting it lapse would mean you may need to restart those if you take a new policy later. Also, a new health insurance policy will have fresh waiting periods for various illness and/or surgeries for 2-4 years.

If you are unsure, consider downgrading to a lower coverage plan instead of cancelling your existing policy outright.

Uma S. Chander, CFP® Handholding Financials