INDEXATION-INFLATION DISCOUNTING - MUTUAL FUND DEBT FUNDS HOLDERS CAN benefit from it..

 As the name suggests Indexation - relaxation of cost of inflation , price of a unit of debt mutual funds or real estate assets .Indian Government discounts price hike of a property due to inflation .

A Debt mutual fund is a kind of loaning to borrowers from investors who invest the excess money in the debt mutual fund schemes , basically investors gets rental income in terms of interest payment on a periodic basis and get back principal amount once bond tenure ends , So the profit over principal is called gains , a long term gain is called once an investor invests money in a debt mutual fund for more than 3 years of period , after 3 years Capital as a principal and interest as gains realized by the investor , the taxation is called long term capital gain tax or LTCG in short form.

Let us assume , I invested 100000/- INR on 15.07.2018 in a debt mutual fund schemes and today on 16th of July 2021 withdrawing the money from scheme , let say return realized @ 7% per annum compounded annually , So the maturity after three years would be 122,504 INR , Here 122,504 has two component as Principal investment amount =100,000 and Long term Gain=22504/- which is 22.4 % 


now here comes the Indexation Benefit to the investors , How come ?? let us took base year as 2018 and index as 100 , Government reports of price inflation get published on RBI /SEBI websites , let say average CPI (consumer price inflation) were 7% in the last three financial years , 2018-2021 , so the base Index calculations will clarify the cost of inflation ,    

Year -2018-2019 - 100 , inflation @7% per annum 

Year -2019-2020 - 107 , (100 is base and 7% over 100 becomes 107)

year -2020-2021 - 114.49 (107 becomes 114.49 )

Year-2021-2022  - 122.50 (114.49 becomes 122.50)

there is a 22.5 % of price hike in three years 

here index grew at the rate of 7% each year because of the hike in the price of goods , so the government says it will give a discount of inflation because of price hike , while filing return for long term capital gain after three Financial Years of holding investment in the debt mutual funds , one can get indexation benefits of 22.5% from capital gains generated over principal of INR 100000/- 

here in this case 22.5% return is from the investment and 22.5% is also the indexed cost of inflation , so both are equal, hence the investor will get a discount of INR 22500  form long term capital gains .

Investors do not need to pay any tax on gains realized from investing in debt mutual fund scheme , 

FD gets TDS and tax treatment as per income tax slabs , which is a wealth erosion scheme .

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