Parking money in mutual funds has emerged as one of the best ways to save tax. Many investors have not only started taking it into serious consideration, but also making investments in long term debt funds. Number of investors are growing, who have displayed interest in long term investment schemes. Though, the inclination is steep, investors often forget to include indexation benefit while planning to invest.
Indexation is the key to save taxes in long run through investing in long-term debt funds. Investments made or held for three years; earn profits which are termed as LTCG (Long Term Capital Gains). Taxed at 20%, these gains are come tagged with indexation benefit, where indexation enables investor to boost or increase the purchase price via cost Inflation Index.
To calculate LTCG, the increased purchase price (adjusted for inflation) is deducted from the sale price; which in turn lowers the taxable gains. You can calculate the indexed cost yourself, using CII of two financial years (1st year- when the units where purchase and 2nd year– when the units were sold).
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