Indexation- A Technique to Save Tax on Long Term Debt Funds

wealthfundIndexation is a technique, using which investor can save more tax on capital gains. But in order to avail benefits in debt funds, investor should have a clear idea about the this market technique and how to bring it to effective use.

What is indexation?

It is a tax adjustment technique, which takes into account inflation from the time of fund purchase to redemption. It is utilized to adjust tax payments on long term capital gains. Indexation is implemented on Debt funds, Real estate, Gold, and other asset classes, which are for three years or more. Fixed return instruments, like FD (Fixed Deposits) are not entitled for indexation.

Why indexation?

Inflation causes a huge impact on asset value, which cannot be ignored. Therefore, it is necessary to take inflation into consideration when computing tax, so as to determine the actual difference between buy and sell cost of the units. CII or Cost Inflation Index is a inflation index tool used by the Government to measure the rate of inflation in the economy. Determined and utilized by the central government, the index reflects the increase in inflation on yearly basis.

What’s the key benefit?

If you wish to reduce tax burden, especially when calculating capital gains on debt mutual funds, indexation should be taken into account. Using this technique, investor can counter decreasing asset value over the pre-defined time period. After 3 years of investment in Debt Funds, Investor can implement this technique to reduce the tax burden. Indexation is also one of the factors that make Debt funds a better alternative to Bank FDs.

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