If I invest ₹10 lakh in a debt fund for more than 3 years, will I get all the tax breaks? Further if I opt for systematic withdrawals of ₹50000 per quarter, will my income of ₹2 lakh be liable for taxation for that financial year, given that my intention is to remain invested for more than 3 years.
-Shivaji Sen
Debt fund investments held for more than three years are subject to long-term capital gains tax at the rate of 20 per cent after providing inflation indexation benefit on the original investment.
Let's understand this with a simple illustration. Suppose an investor bought 100 units of a debt fund at a price of ₹10 per unit and sold them 4 years later at ₹15 per unit, thereby earning capital gains of ₹5 per unit. Now let's assume that in this period, inflation was roughly 2.5% per annum, leading to an overall increase in prices during the 4-year block by 10%. After factoring in this 10% rise in prices, his inflation adjusted purchase price will be ₹11 per unit. And in turn, his inflation adjust capital gains will be ₹4 per unit, which will be taxed at the rate of 20%.
Therefore, in your case, your entire ₹2 lakh of redemption proceeds will not be put to tax, but only the gains part, i.e., the amount left after subtracting your inflation-adjusted purchase price.
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