Tax-efficient portfolio design

Tax-aware portfolio design improves after-tax returns 50-150 bps annually — material over decades. The four levers: asset location (place tax-inefficient assets in tax-advantaged accounts), tax-loss harvesting, deferral (longer holding = LTCG benefit), and product selection (equity LTCG ₹1.25 lakh exemption per year per investor).

Asset location: equity funds in regular accounts (LTCG advantage), debt in tax-advantaged accounts (NPS, PPF) where possible. Loss harvesting: sell loss-making positions to crystallise LTCL (set-off against LTCG; carry forward 8 years) or STCL (set-off against any capital gain). Replace with similar-but-not-identical investment to maintain exposure. Deferral: hold equity 12+ months for LTCG benefit. Product selection: equity-oriented hybrids (≥65% equity) get equity tax treatment — useful for moderate-risk clients who want lower volatility but equity tax. Post-Budget 2024: equity LTCG raised to 12.5% (above ₹1.25 lakh), STCG to 20%; debt taxation continues at slab rates.

Subtle insight: the "deferral premium" of long-hold equity. Equity at LTCG 12.5% (effective) vs slab-rate 30% means the same fund gives 75% more after-tax wealth at retirement when held with LTCG vs when churned. This single discipline is worth more than most product selection. RIAs should design IPS that minimises churning unless tactically required. Also: dividends are now taxed at slab rates, so high-dividend funds are tax-inefficient for high-bracket clients — growth options dominate.