Tax Free Allowance

A friend told me he has never sold a single unit of his index fund in seven years. He said it the way people say they floss every day. A small, quiet virtue.

On almost every count, he is right. Staying invested is the whole game.

On one line, though, it is costing him.

Every financial year, the tax code lets you book Rs 1,25,000 of long term equity gains completely tax free. Section 112A. It resets every April, and it does not carry forward. Use it or lose it.

If you never sell, you use exactly one year of that allowance in your entire investing life, on the day you finally cash out. Every other year's slice just expires, unnoticed.

Here is the part that made him sit up. Put Rs 10 lakh in a fund at 12 percent for twenty years and it grows to about Rs 96 lakh either way. Sell it all at the end and the tax bill is Rs 10,65,162. Book roughly Rs 1,25,000 of gain each year instead, buy the same units straight back, and the bill drops to Rs 7,68,287. Same fund. Same return. About Rs 2,96,875 stays in your pocket, purely because you stopped letting a free allowance expire.

The mechanic is unglamorous. Realise a small long term gain, pay nothing on it because it sits under the exemption, buy the units back at the new higher cost. Two honest catches. The rebought units start a fresh twelve month clock, and small transaction costs apply, so this only makes sense for holdings you were never going to trade anyway.

I like it because it is the rare edge that has nothing to do with predicting anything. The market decides your return. This one line you actually control.

Most people forget it is there every single April, and call the forgetting discipline.

If you want to see how the tax line sits inside a plan: