Indexation

POSTED BY Ramprasad ON May 24, 2012 11:37 am COMMENTS (10)

Hi,
In debt mutual funds, tax structure says , for LTCG is 10% without indexation and 20% with indexation.
What is the meaning of this indexation and how is it decided?
Ramprasad

10 replies on this article “Indexation”

  1. Renu Chauhan says:

    Hi Ramprasad,

    As you have mentioned that you have started investing in this fund since Feb 2010 it is too early to predict the performance of the fund. The markets also have not been very favourable and even currently are in 16000. So 2 years is just a very small time to judge the performance of an equity fund. I completely agree with Ashal that you shoud hold this fund (without doing any additional investments) at least for 6 more months and then take a decision.

    Also remember a Golden Rule: Buy when markets are low and Sell when markets are High.

    In India we have been doing just the reverse which we shouldnt. So give the fund a little time and come out of it when markets are high ( dont wait for hypothetical levels, anything close 18000 should be satisfactory in this case) so that even if you are facing losses they are minimum. πŸ™‚

    Apart from that the other fund category that you want to switch from this should be chosen wisely. SO think over it if you really want to remove money from an equity oriented fund to a debt fund or may be you can keep both these investments separate. Think about it πŸ™‚

    Thanks

    Renu πŸ™‚

  2. Ramprasad says:

    Hi Renu,
    I started BSL equity in Feb 2010. After 19 SIP months, I stopped the installments.
    My lst SIP units are 7 months old.

    Ramprasad

    1. Dear Ramprasad, in my opinion, as per the recent performance, you may give one more try to this fund for at least next 6 months for your old money if not investing fresh.

      Thanks

      Ashal

  3. Renu Chauhan says:

    Hi Ramprasad,

    Can you please share when you started investing in the fund and stopped the SIP after how many installments. Would help us address your query better πŸ™‚

    Renu

  4. Ramprasad says:

    Thanks Renu and Ashal,
    I understood now. Actually I have one BSL Equity fund which is not performing well. I have stopped SIP in this and don’t want to redeem now.

    I thought to swtich these units to BSL Gilt fund. There I saw for debt/Gilt fund, there applies LTCG.

    Suggest me should I keep the units or swtich the units.

    Ramprasad

    1. Dear Ramprasad, please check the below link.

      http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=561

      In my opinion, the recent performance of the fund is showing some signs of improvements. You may give it a try for next 3-6 months at least.

      Thanks

      Ashal

  5. Dear Ramprasad, the general brief for indexation is already provided to you by dear Renu. Here is some additional info on CII (cost inflation index). Please check the below link.

    http://taxguru.in/income-tax/cost-inflation-index-meaning-and-index-for-all-the-years.html

    Thanks

    Ashal

  6. Renu Chauhan says:

    Thank You πŸ™‚

    Renu

  7. Renu Chauhan says:

    Hi Ramprasad,

    Financial definition of indexation is that “It is a technique to adjust income payments by means of a price index, in order to maintain the purchasing power of the public after INFLATION”

    Now let me explain this with an example:

    If you had invested Rs. 100,000 in a fixed income mutual fund in Financial Year (FY) 2007-08 i.e., between 1 April 2007 and 31 March 2008 and sold the units for Rs. 135,000 in FY2010-11, your capital gain without indexation is Rs. 35,000 and you stand to pay Rs. 3,500 as tax. [Our illustration assumes a CAGR of 7.75% over 4 years on this fund.]

    However, let’s consider the indexed purchase price, which is derived by using the COST INFLATION INDEX for the year of purchase and sale. The COST INFLATION INDEX figure is a factor that allows you to compute the current value of a sum of money taking into account the effect of INFLATION. (Cost Inflation Index (CII) values released by the Income Tax department every year).

    Indexed Purchase Price = Purchase Price X (CII of Current Year/CII of Purchase Year)

    In our case, this is: 100,000 X (711/551) = Rs. 129,038 (which means that in 2011 terms, the cost of your investment is Rs. 129,038)

    Capital gain with indexation = Rs. 5962
    Long Term Capital Gains Tax with indexation = Rs. 1192

    The investor will pay the lower of Rs 1192 and Rs 3500 i.e. Rs 1192 as the Long-term Capital Gain Tax.

    Below are few links you may find helpful

    https://www.jagoinvestor.com/2009/05/how-to-calculate-capital-gains-and-what_7801.html

    http://www.fundsupermart.co.in/main/research/article-How-Investing-in-Mutual-Funds-Saves-Tax-614.html

    Hope this helps πŸ™‚

    Thanks,
    Renu

    1. Ramesh says:

      Very well-written.
      Thanks.

      Ramesh

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