Let’s say you invested in a debt fund in July 2016. Your investment
amount was Rs.10,000, and you bought the units at a NAV of Rs.10. Three
years later, you redeem your investments in August 2019 at a NAV of
Rs.20. Hence, when you sold your investments, the value of your
investments was Rs.20,000. Your investment made capital gains worth
Rs.10,000.
However, you need not pay tax on this entire amount of Rs.10,000. As
your holding period was three years, you will get the benefit of
indexation to reduce the value of your long-term capital gains. To
arrive at the Indexed Cost of Acquisition (ICoA), you have to use the
following formula:
ICoA = Original cost of acquisition * (CII of the year of sale/CII of year of purchase)
In the example mentioned above, the indexed cost of acquisition will be Rs.10,947, i.e., (10,000 * 289/264).
Hence, instead of Rs.10,000, your capital gains will now be Rs.9,053, i.e. (Rs.20,000 – Rs.10,947).
Using indexation, you would have managed not to pay tax on Rs.947 of
your gains. Your tax will be computed on only Rs.9,053, which will be
equal to Rs.1,810. The benefit of indexation works best when your
holding period is longer. For a holding period of 5 years, long-term
capital gains tax on debt funds can come down from 20% to 6-7%. This is
how indexation helps you to save tax on long-term capital gains from debt mutual funds and enhance your earnings.
For more information on this, visit TAXAJ
Posted by Aashima
Team TaxaJ