TAX BENEFITS THROUGH INDEXATION IN MUTUAL FUNDS

There are very few things which are both “Legal” as well as “Lethal”. Tax is one of them. When you allocate investment for long term financial goals, taxation will make a lot of difference in your corpus allocation.

The profit you make in your investments through Mutual funds by redeeming or selling off the units known as Capital-Gain. It can be short term capital-gain or can be Long term capital-gain, depending on the period of holding. The tax applicable on profits is known as the ‘capital-gains tax’.

Funds which are investing at least 65% percent of the amount in equity and equity related instruments are known as equity mutual funds. Equity funds could be large cap funds, mid-cap funds, balanced funds, sector funds, etc. Mutual funds investing less that 65% of the fund corpus in equity are known as non-equity fund or Debt fund. Examples of such funds are international funds, money market funds, liquid funds, etc.

If you sell or redeem the units of equity funds after holding for the period of 12 months, your investment is applicable for Long term capital-gain tax which is Zero at the moment. If you sell your equity fund before 12 months, the investment is eligible for short term capital-gain tax at the rate of 15%. 

Whereas, if you sell units of Debt fund within a period of three years, the profit earned on the sell of unit is eligible for short term capital-gain tax. If you sell or redeem your units after the period of three years then you pay long term capital-gain tax at the rate of 20% after indexation. 

Below is a calculative theory of the same –

Say, you invested Rs.10lakhs in a debt fund in 2011-12. Assuming funds returned 9%. You redeem it for Rs.15, 38,624 in 2016-17. Your long term capital gains are Rs.5, 38,624 without indexation. If you use indexation method, Index for 2010-11 and 2015-16, your taxable gain will be only Rs.18, 231. A 20% tax on this amount is Rs.3, 646. That’s the benefit of indexation, taxable gains are much lower than what they would be without indexation.

So if tax saving is the purpose then the route of tax saving mutual fund is the best option for investors under section 80c.

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