How indexation benefits impact your investment?

'Disclaimer: This story is for informational purposes only and should not be taken as investment advice.'

The Union Budget 2018 introduced the long-term capital gain (LTCG) tax without the benefit of indexation after it was abolished in 2004. We tell you how indexation benefits help you.

Indexation is a prudent way to prevent draining your debt fund returns by way of taxes.

It helps you inflate the purchase price of the debt mutual funds. In this way you can lower your tax liability.

By applying indexation, you can actually reduce your long-term capital gains to lower your taxable income. This is the reason debt funds are regarded as superior fixed-income investments than fixed deposits (FDs).

Thus, in this way indexation makes the game of investment a win-win affair.

The rate of inflation used for indexation can be taken from the government’s Cost Inflation Index (CII). The values in the index are determined by the central government and updated on the Income Tax department’s website. You can view the Cost Inflation Index from 1981 onwards.

Capital gains refer to an increase in the value of an investment over a specific time frame.

If the NAV of your debt fund was Rs 10 last year and today it stands at Rs 15, your investment has experienced a capital gain, according to Cleartax, a tax consultancy firm.

In other words, capital gains is the difference in the purchase price and current market price of an investment.

In case of debt funds, you make long term capital gains when your holding period is more than 36 months. Now,  equity mutual funds will be taxed at 10% on profits in excess of Rs 1 lakh, if the assets are held for a minimum period of twelve months.