4 Indexation benefit:
- Long term capital gains (holding period of over 3 years) from debt mutual fund schemes are taxed at 20% plus applicable surcharge and cess with the benefit of indexation.
- Government notifies Cost Inflation Index (CII) for each financial year taking into consideration the prevailing inflation levels
- The cost of purchase for computation for tax is adjusted for inflation using CII, thereby reducing the capital gains from tax perspective.
- An investment made in debt mutual fund toward the end of financial year (say, in March 2020) and held it for a little over 3 years (say, in April 2023) would be eligible for application of CII over 5 financial years and resulting in 4 indexation benefit.
(#Investors can avail the 4-indexation benefit, if they invest in the above schemes on or before March 31,2020 and redeem during FY 2023-24)
Illustration demonstrating the benefit of investing in debt mutual fund at the of the year:
| Investment at the March end | Investments post March | |
| Investment Amount | ₹ 10,00,000 | ₹ 10,00,000 |
| Investment Date | 30-Mar-16 | 01-Apr-16 |
| Redemption Date | 01-Apr-19 | 01-Apr-19 |
| Indexation Benefit Applicable | Yes | Yes |
| Expected Value assuming 7% growth rate | ₹ 12,25,043 | ₹ 12,25,043 |
| Gains | ₹ 2,25,043 | ₹ 2,25,043 |
| Tax Post indexation | ₹ 17,449 | ₹ 26,029 |
| Final Value Post Tax and Indexation | ₹ 12,07,594 | ₹ 11,99,014 |
Note: The above table is just for illustration purpose only. Investors should be aware that the fiscal rules/tax laws may change and there can be no guarantee the current tax positions may continue indefinitely.
You may consider opting for debt mutual fund schemes at the end of the year.
Happy Investing.
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