Debt Funds Indexation calculation

Indexation method is used to compute tax amount when you sell debt mutual funds Long Term Capital gains are applied on the sale of debt mutual funds . This is applicable to long-term capital gains on debt mutual funds that have been held for 36 months and more

Let us understand it with a simple example.
Let us assume you ‘ve purchased Debt Mutual Funds of Rs10000/- in 2011-12 and sold in 2015-2016 for Rs 15000. If there was no indexation, you will have to pay LTCG tax on entire Rs5000 profit (15000-10000)

With Indexation, your cost price is adjusted as per inflation.
Inflation-adjusted cost price = Actual Cost Price* (CII of the year of sale/CII for the year of purchase)
Inflation adjusted Cost price= 10,000*(254/200)= Rs12,700
Therefore LTCG tax is applicable on Rs 2300 (15,000-12,700)

The higher the holding period , the more benefits indexation will have. Long-term capital gains tax on debt funds can come down from 20% to 5-7%. When you invest for more than 5 years in debt funds.

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