Day 364 vs Day 366

A friend texted me Monday morning. He wanted to redeem an equity mutual fund the next day. 360 days since the original cheque had cleared. He needed the money for an upcoming spend. Could he just hit sell.

I asked him one question. Lump sum or SIP. Lump sum, he said.

I told him to wait six days. Here is what those six days are worth.

Same Rs 10 lakh in. Same Rs 12 lakh paper value today. Two calendar days apart on the sell side.

On day 364, three things are still alive on his ticket. The exit load schedule (most equity MFs charge 1 pct if redeemed inside a year, so Rs 12000 on a Rs 12L NAV). The STCG bracket at 20 pct on the post-load gain of Rs 1.88L, which is Rs 37600. And no LTCG exemption, because the unit clock has not crossed 365 days. Net cheque to him . Rs 11.50 lakh.

On day 366, all three move. Exit load is zero. The 20 pct STCG bracket falls to the 12.5 pct LTCG bracket. The Rs 1.25 lakh per financial year LTCG exemption opens up, so only Rs 75000 of the Rs 2 lakh gain gets taxed at 12.5 pct, which is Rs 9375. Net cheque . Rs 11.90 lakh.

Rs 40225 of net return. Four percentage points on a Rs 10 lakh corpus. Same fund. Same market. Same units. 48 hours.

And this is the easy case. SIP redemptions are worse. The AMC releases units FIFO, so 13 monthly instalments do not mean 13 months of long-term holding. Only month one is past the cliff.

Three rules I gave him. Mark the buy date on every fresh purchase and set a calendar nudge for day 367. Treat SIPs as 12 separate clocks, not one. Plan the sell around the cliff, not around the EMI calendar.

The market does not know the difference between a 365 day hold and a 367 day hold. The taxman does.

Walk-throughs on tax mechanics, exit load math and rebalancing live in the Learn library