After watching this video, you’ll know What is Indexation, How does it lower your tax liability, and what are the financial instruments where you can take benefit from Indexation?
Timeline
0:00: Intro
0:20: What is the indexation benefit
0:40: Understand how indexation works
2:20: When can you take the benefit of indexation
What is the indexation benefit of mutual funds?
We all know Inflation eats into your return on investments. Indexation is a process that allows us to adjust our purchase price of an asset by taking into account the impact of inflation. Indexation considers the inflation from the time you invested in the asset till the time you sell it.
Let us understand with an example;
Let’s say you invested ₹50,000 in a debt mutual fund scheme in June 2016 and redeemed from the fund at the value of ₹80,000 in June 2022 and made a profit of ₹30,000. Because the holding period exceeds 36 months, Long Term Capital Gains tax rules will apply where Indexation is available.
To calculate the profit for tax purposes, we must adjust our purchase price, ₹50,000, with inflation. To do so, we will use the Cost Inflation Index Table available on the Income Tax Website.
As we can see in the table the Cost Inflation Index in the year you invested i.e FY17 was 264, and the year you redeemed your investment i.e FY23 is 331. This simply means something that cost ₹264 in 2017 will cost ₹331 in FY23. To Adjust our purchase cost with inflation we will divide the original cost of acquisition i.e ₹50,000 by 264 i.e CCI of FY17 and Multiply by 331 CCI of FY23
The inflation-adjusted purchase cost will be ₹62,689, Hence, instead of Rs. 30,000, your capital gains will now be Rs**.**17,311 (80,000 - 62,689). Since the Long Term Capital Gains Tax is 20%, the effective tax liability would be ₹3,462, which is ₹2,558 lower than the otherwise ₹6,000.
When can you take the Benefit of Indexation?
Indexation is allowed only in the case of Long Term Capital Gains i.e where an asset is held for a period of more than 36 Months. It is important to understand that the Indexation benefit is not available in the case of equity shares or equity mutual funds. Indexation benefit can be taken on all the other capital gains such as the Sale of a House, Jewellery, Debt Funds, etc.
If you haven’t already, start your investing journey on Kuvera - your safe space to invest. Click on the link below to get started.
[ Ссылка ]
👉 Expand your financial knowledge with bite sized content:
►Twitter: [ Ссылка ]
► Instagram: [ Ссылка ]
► Blog: [ Ссылка ]
► LinkedIn: [ Ссылка ]
