Gains of Double Indexation | Value Research If you are planning a debt fund investment early in the next financial year, it will be worthwhile to advance it a bit and do so before the end of the year. Here is how it will be more tax efficient
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Gains of Double Indexation

If you are planning a debt fund investment early in the next financial year, it will be worthwhile to advance it a bit and do so before the end of the year. Here is how it will be more tax efficient

If you are planning a debt fund investment early in the next financial year, it will be worthwhile to advance it a bit and do so before the end of the year. Here is how it will be more tax efficient.

Debt funds are taxed at the lower rate of 10 per cent of the capital gains without indexation or 20 per cent with indexation. Indexation is essentially an inflation adjustment made on long - term (i.e. more than one year) capital gains earned by you. If you invest before the end of financial year, you will be able to avail the indexation benefit of one additional year.

The table illustrates how an investor can avail the indexation benefit for two years instead of one (popularly called the 'double indexation' benefit) by investing just before March 31. This leads to an increase in the deemed cost of investment (the indexed cost of acquisition) for taxation purposes, and hence a reduction in tax liability. While the illustration assumes an investment made in 2005, it will work in a similar way for any financial year.

Although this is applicable for all debt funds, it is particularly popular with FMP investors. They typically invest in FMPs of a little over one year duration just before the end of the financial year and pay lesser tax on the gains.


Investment
    Before March 31, 05  After March 31, 05
i Amount Invested 100,000 100,000
ii Gains (assuming 9% return) 9,000 9,000
iii Redemption Value (i+ii) 109,000 109,000
iv Indexed cost of acquisition* 108,125 104,427
v Taxable Gains (iii-iv) 875 4,573
VI Capital Gains Tax 175 915
Note: Assuming investment in a 14-month FMP Figures in Rs




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