Investment in Debt Mutual Fund,
Gold, Real Estate:
How indexation
works..?
Indexation is a process by which
the government compensates
investors in debt, gold, real
estate etc so that the investor does not have to incur any loss in real terms.
Due to inflation, the market
price of an asset may not reflect the real value of the asset.
So, if the government taxes an
investor going by the market price, that may turn out to be a disincentive to
invest. Hence government allows inflation-adjusted selling price to determine
the capital gain for incidence of taxation on the seller.
● Capital gain =
(Selling price at market value – Inflation-adjusted purchase price)
● Inflation-adjusted purchase price =
Original purchase price (Consumer inflation index for the year of
sale/Consumer inflation for the year of purchase)
● Suppose an investor had bought a house for Rs. 5 lakh in 2000 and sold it
for Rs 10 lakh in 2010.
● Government data shows in 2000, CPI was 406 and in 2010 it was 711.
● So the person’s indexed purchase price will be about Rs 8.76 lakh.
● So the person’s capital gain will be Rs 10 lakh – Rs 8.76 lakh = Rs 1.24
lakh.
● His / her tax will be calculated on Rs 1.24 lakh. In the absence of
indexation the tax would be calculated on Rs. 5 lakh,
that is on (Rs. 10 lakh – Rs. 5 lakh).
● Debt mutual funds enjoy benefits of indexation when held for more than
three (3) years
From
UTI MF - Swantra
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