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Double indexation simply means getting the benefit of two years of indexation when the holding period for investments has been substantially less than two years.
Concept of Double Indexation
- If Mr. ABC had bought 10 units of mutual fund for Rs. 10,000 on 1st April 2011 and sold them for 11,000 on 1st April 2012. (Holding period- 1 year).
- If Mr. ABC had bought 10 units of mutual fund for Rs. 10,000 on 31st March 2011 and sold them for 11,000 on 1st April 2012. (Holding period- 1 year and 1 day)
In the two examples given above, the information is same except the year of purchase, which differs by just one day.The difference in one day changes the financial year of purchase for Mr. ABC, which changes the CII numbers to be used for indexation.
Case A: Single Indexation
| Particulars | Amount (Rs.) | |||
| Cost of Purchase | 10,000 | |||
| CII- year of purchase (2011-12)* | 785 | |||
| CII-year of sale (2012-13)* | 852 | |||
| Adjusted cost of purchase | 10,854 | |||
| Taxable return - with indexation (Rs.11,000 - Rs,10,854) | 146 | |||
*Source: Central Board of Direct Taxes (CBDT)
Case B: Double Indexation
| Particulars | Amount (Rs.) | |||
| Cost of Purchase | 10,000 | |||
| CII- year of purchase (2010-11)* | 711 | |||
| CII-year of sale (2012-13)* | 852 | |||
| Adjusted cost of purchase | 11,983 | |||
| Taxable return - with indexation (Rs.11,000 - Rs.11,983) | (983) | |||
*Source: Central Board of Direct Taxes (CBDT)
Here is a small comparison between Fixed Deposits & FMP with Double Indexation Benefits:
|
| Fixed Deposits (assumed for investor at highest tax bracket) | FMP With Double Indexation | ||||
| Amount Invested | 100,000 | 100,000 | ||||
| Tenor in Days | 500 | 500 | ||||
| Assumed Returns | 9.50% | 9.50% | ||||
| Maturity Value | 113,014 | 113,014 | ||||
| Interest Gains | 13,014 | 13,014 | ||||
| Indexed Costs* | Nil | 119,831 | ||||
| Indexation Gain/Loss | Nil | (6817)# | ||||
| Tax Rate | 30.09% | 20.60% | ||||
| Tax on interest income | 4,021 |
| ||||
| Tax on capital gains |
|
| ||||
| Post Tax Income | 8,993 | 13,014 | ||||
| Post Tax Return (Simple Interest) | 6.56% | 9.50% | ||||
* CII in 2010-11 was 711 and CII in 2012-13 is 852. Source: Central Board of Direct Taxes (CBDT).
#Investors can set of Long Term Losses with Long Term Gains
@ Investors should be aware that the fiscal rules/tax laws may change and there can be no guarantee that the current tax position may continue indefinitely. In view of the individual nature of tax consequences, each investor is advised to consult his/her professional tax advisor.
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