Long-term capital gains (LTCG) earned on debt mutual funds are eligible for indexation advantages earlier than they are taxed. Gains made on funding in debt mutual funds held for extra than 36 months is considered LTCG, and indexation gain is to be had on it. The indexation gain offers debt funds aside over different constant-profit investments and financial institution deposits in terms of put up-tax returns. One of the matters that make debt finances appealing is their max performance. What is indexation advantage, and how is it calculated?

Mutual funds provide returns in the form of dividends and capital profits. The dividend is paid periodically by using the mutual fund to its traders from the returns earned. Capital gains are earned while mutual fund gadgets are redeemed through the investor at a better than the acquisition fee. The capital gains earned are difficult to tax inside the arms of the investor. The cost of tax depends upon elements— whether the capital advantage turned into won over a short- or long-time period length, and whether or not it is earned from a debtor equity-oriented scheme. Gains made on funding in debt mutual price range held for greater than 36 months is considered LTCG, and indexation benefit is to be had on it.


Indexation is the procedure of fixing the acquisition fee of funding for inflation. The Cost of Inflation Index (CII) is used to index the acquisition price of the mutual fund unit. The buying price is improved by the CII for the 12 months wherein the sale is made and divided using the CII for the year in which the purchase was made. The CII for every monetary yr is to be had on the income-tax website, incometaxindia.Gov.In. The listed fee so arrived at is used to calculate the capital gains on which LTCG tax of 20% plus a surcharge of 10% plus schooling cess of four% (22.88%) is relevant.

If inflation has been high within the duration between the acquisition and sale of the funding, then the indexed value of the addition of the funding will cross up, reducing the answerable profits for taxation. Remember, this adjustment of purchase rate is made only for calculating the tax on capital gains, and it does no longer imply that the actual benefits or profit you made will stand decreased.

For example, if 1,000 units had been purchased in FY14 for ₹15 and offered inside the yr 2018-19 for ₹22.04, the go back could be 8%. The profit made in this transaction is a thousand x (22.04 – 15) or ₹7,040. Since the period of holding is more than 36 months, for the reason of taxation, the price of purchase of units has listed the use of the CII for the years FY14 (220) and FY19 (280) as ₹15 x 280/220 or ₹19.09. LTCG on which tax will follow is a thousand x (22.04 – 19.09) of ₹2,949.01, and you are liable to pay a fee of only ₹674.73 (22% of ₹2,949.01) as towards ₹1,610.73 (22.88% of ₹7,040) without indexation.

The indexation benefit gives debt budget an aspect over different constant-earnings investments, including financial institution deposits in phrases of publish-tax returns. The hobby earnings earned on a financial institution FD are introduced to the entire profits and taxed on the income tax slab applicable to the investor. Assume that comparable funding of ₹15,000 became made in a financial institution FD with the same go back of 8% as the mutual fund product referred to earlier.

At the quit of 5 years, the FD has a maturity price of ₹22,040, and the hobby issue of ₹7,040 (22,040-15,000) could be taxable at the investor’s tax slab charge. Even at the bottom tax bracket of 10%, the investor can pay a tax of ₹805.367 (along with surcharge and cess), that’s higher than the burden on the debt fund after indexation.