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Before coming to the benefit of double indexation let me explain you the tax structure of debt mutual funds:
- Any Short term capital gain in debt funds will be added in the investors’ income and taxed as per the income tax slabs one falls into.
- Any Long term capital gain tax in debt funds will be taxed as 10% of the actual long term capital gain or 20% of the indexed capital gain (Selling price minus indexed cost), whichever is less.
Indexation or double indexation helps in considerable reduction of tax outgo, by inflating the cost of investment and thus reducing the actual gains booked. Going back to the above example:
The maturity value (tentative) of the Investment is Rs 1,11,500/-. Thus the absolute gain in this transaction is Rs 11,500/- . To calculate tax on this gain as the holding is for long term so indexation has to be done, and this particular case is of double indexation. The indexed cost as calculated above is Rs 1,19,617/- . So there is no gain but indexed loss of Rs (-8117)/-.
Thus Tax calculation would be as follows :
10% on Rs 11500/- or 20% on Rs (-8117/-) whichever is less, means ZERO.
Imagining the above investments in a bank deposit, you can assume the quantum of tax you would have been subjected to pay. As the bank deposits’ interest is taxed as per tax slabs, so the payout will be huge as compared to Debt Mutual funds.
Since the concept of indexation applies in capital assets and debt mutual funds are very much comparable to bank deposits which are 100% taxable. So by diverting savings from bank deposits and investing in Debt mutual funds one may reduce the considerable tax outgo. Moreover by investing in the end of a financial year i.e in Jan-Mar and withdrawing the funds or getting the maturity proceeds after April next year, one can take the advantage of double indexation also.
These days you will find many Fixed maturity plans coming with double indexation benefit, check out with your adviser to make the most of this opportunity.
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