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Taxation on debt mutual funds

Long term capital loss arising out of sale of assets can be set off against long term capital gains arising from sale of any asset

Will an investment in debt fund if held for three years (grwoth scheme) attract any tax liability? How is the tax calculated for that investment?
- S Ramanathan

If investments in debt mutual funds are held for more than three years, it will attract long-term capital gains tax of 20 per cent with indexation benefit.

The formula to calculate capital gains with the help of indexation is : sale price - indexed cost of acquisition.

The formula to calculate indexed cost of acquisition is: purchase price x cost inflation index of the year of sale/cost inflation index of the year of purchase.

You can get cost inflation index from the Income Tax website.

Here is an example. Suppose you have invested ₹1 lakh in financial year 2012 and sold your investment and got ₹1.2 lakh in financial year 2015.

Your indexed cost of acquisition is : ₹1 lakh (purchase price) X 1024 (cost inflation index of the year of sale)/ 785 (cost inflation index of the year of purchase) = ₹1,30,445.9

Long term capital gains is: 1,20,000 (sale price) - 1,30,445.9 (indexed cost of acquisition) = -10,445.9

As you can see, the indexation has resulted in a long-term capital loss here. Long term capital loss arising out of sale of assets can be set off against long term capital gains arising from sale of any asset. Long term capital loss can be carried forward for eight years.

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