Spend, Save and Invest Smartly
You are tired of the stock markets. One day they are Up…the next day they fall down. You just don’t know what to do. You don’t want to look at the stock markets anymore. You just want your money to be safe. That is when you decide to invest in debt funds. But there is a problem. You don’t know much about taxation of these debt funds.
Debt funds typically invest in fixed income securities. A fixed income security gives you periodic payments on the money you invest. On maturity of the debt fund the principal (money you invest ) is returned.
These are the types of debt funds
If you buy A debt fund And sell it for a profit your gains are called capital gains.
Prices of goods such as fruits, vegetables, meat, services such as transport, houses, garments and so on increase with time. This is inflation. Indexation basically means you take the effects of inflation into consideration while calculating tax on your capital gains.
You had purchased units of a debt mutual fund worth INR 20000 (Based on the net asset value) on February 2010.
You sold these units of the debt mutual fund for INR 30000 on September 2014.
You made a long term capital gain of INR 10000 on the sale of the debt mutual fund as you have sold it after 3 years.
*A debt mutual fund is a type of debt fund
|Date you purchased units of the debt mutual fund||February 2010|
|Date you sold units of the debt mutual fund||September 2014|
|Purchase price of the debt mutual fund||INR 20,000|
|Selling price of the debt mutual fund||INR 30,000|
|CII for the year 2009- 2010 (Purchase)||632|
|CII for the year 2014 – 2015 (Sale)||1024|
You had invested INR 20000 in units of a debt mutual fund on February 2010 and sold these units on September 2014 for INR 30000. You made a profit of INR 10000.
INR 20000 does not have the same value (purchasing power) in September 2014 as it had in February 2010 but has a much lesser value with the passage of time due to inflation.
The capital gains are much larger owing to the effects of inflation not being considered when tax is calculated without indexation.
Indexation saves tax on capital gains by factoring change in the purchasing power of money due to inflation.
With effect from April 1st 2014 long term capital gains on debt funds are taxed at 20 % with indexation.
You had purchased units of the debt mutual fund of value = INR 20000
You had sold units of debt mutual fund of value = INR 30000
The debt mutual fund was purchased on February 2010 (F.Y. 2009-2010)
The debt mutual fund was sold on September 2014 (F.Y. 2014-2015)
Indexed cost of purchase = (Purchase price of debt mutual fund / CII for the year 2009-2010) * (CII for the year 2014-2015). Indexed cost of purchase = (INR 20000 / 632) * 1024 = INR 32405
You sold the debt mutual fund for INR 30000 in September 2014. Long term capital gain on the debt mutual fund = Selling price of the debt mutual fund – indexed cost of purchase of the debt mutual fund. The long term capital gain is INR 30000 – INR 32405= (INR 2405) You suffered a long term capital loss of INR 2405 and do not have to pay any tax on the returns from the debt mutual fund. The new rule actually helped you save tax on the debt mutual fund as you had held it for over 3 years You learn from this article that nothing beats staying invested in a debt fund for a long time. The age old saying of Warren Buffett “Always invest for the long term” comes to mind. Even taxation can be beaten if you stay invested for the long term.