With just 3 months to go before the financial year ends (March 31), you will hear the term, ‘double indexation’ more often, especially in the context of products such as fixed maturity plans.
What is double indexation and how does it help you in reducing tax outgo? Is double indexation benefit restricted to just FMPs?
Here’s a brief article that will help you make the most of the double indexation benefit.
What’s indexation
The income tax department allows you to bring the cost of certain assets/investments to the present value (based on inflation), while calculating your gains from sale of such investment. As part of this, all debt mutual funds (note that gain from sale of equity funds held over one year are exempt from capital gains tax) held for more than one year enjoy indexation benefits. Read our blog on how indexation works : Make use of indexation benefit for debt funds.
Investing closer to financial year end
Double indexation is nothing but investing in such a way that you invest closer to the end of a financial year and exit soon after the next financial year, to enjoy 2 years (or more) of indexation although you held it for a much shorter period. To provide an example: Let us suppose you invested in a debt fund in February 2014 and you need the money by say April 2015.
Now you would have held the fund for little over a year. But for indexation, you can claim double indexation – for year ending March 2014 and March 2015. If you exit the fund in say April or May 2016, then would you actually enjoy 3 years of indexation, although you would have held it for little over 2 years.
Simply out, investing closer to the end of a financial year and exiting immediately after the a financial year (provided it is held for not less than 1 year) would give you a longer indexation period than your holding.
And how does that help you? It helps you because you bring the cost of your holding, very close to inflation-adjusted values; and in high inflation scenarios (as was the case in the last 2-3 years), your indexed cost may be higher than the sale price. In such a case, you will have no gain and therefore no taxes. Instead, you will only have a long-term capital loss that can be adjusted against long-term capital gain.
Where can you use double indexation
As far as mutual funds are concerned, FMPs appear to be the most sought after product to avail double indexation. But do note that all debt mutual funds (and that includes gold funds and international funds) have capital gains indexation benefit if held for more than 1 year.
That means, whether you invest in liquid funds, ultra short-term or short-term funds and income or gilt funds, as long as your investments are made closer to the year end, and exits are closer to a financial year beginning, you enjoy higher indexation.
So you need not always invest in FMPs. Choose the right debt fund that suits your requirement and is a sound performer and gain the most!
Wealth Conversations – April 2024- Temporary suspension of subscriptions in ” Mirae Asset Global Electric & Autonomous Vehicles ETFs Fund of Fund & Mirae Asset Global X Artificial Intelligence & Technology ETF Fund of Fund
- Merger Announcement: Aditya Birla Sun Life CRISIL IBX AAA Mar 2024 Index Fund
Here is everything that you need to know about Arbitrage Funds- Temporary suspension of subscriptions in “DSP US Treasury Fund of Fund”
Hi Vidya,
One question from IT returns perspective –
Suppose we take the above scenarios of double indexation, say one invests Rs. 10,000.00 in a FMP in Feb 2014 and sells/encashes in Apr 2015 taking advantage of double indexing. Say the maturity value is Rs. 11,500.00.
In the financial year 2015, since the fund has been held for more than a year, do we have to disclose the gain at all? If yes )or even if no), how do we get the double indexation benefit…meaning, how do we disclose and seek back the indexation benefit.
You have shown what is double indexation with an example. Will help if you also illustrate how do we disclose the gains and then take the benefit from IT returns perspective…
Thanks,
Raj
Hello Raj, Capital gains have to be disclosed after doing the calculation. If there is a loss after calc. then that has to be disclosed. the blog link I have given in the article (of an earlier blog) – https://blog.fundsindia.com/blog/mutual-funds/make-use-of-indexation-benefit-for-debt-funds/1971
– will show you how indexation is done..it is no different for double indexation..just the year taken will be different. thanks,
Hi Vidya,
I have a tax related question (not directly related to the post):
If one invests in an ELSS (Tax Saving) scheme but does NOT avail of the relevant tax benefit (say because the 1 Lakh limit was already used due to PPF or other such investments), is there still a lock in required/enforced on the ELSS investment/scheme?
Thank you.
Narayanan.
Hello Narayanan, As far as I gather, the lock-in is 3 years, whichever way. Separately note that by investing in ELSS, youa re investing in equities and it is not a good idea to have a time period of less than 3 years in equities, any which way. tks, Vidya
Hello,
Thanks for providing the complete list. I did not know International Funds are eligible for this indexation benefit.
Are Feeder funds and Fund-of-Funds also eligible for this benefit?
Where to see the indexation numbers for each Financial Year?
And, please post an example calculation for this: separately for single and double indexation types.
Asides tax benefit, is SIP mode recommended for debt funds ?
Your blog posts are helpful in learning new frontiers & their benefits in investing.
Thanks very much,
Ranga
Hello sir,
thanks, yes all feeder and FOF funds also get indexation benefit if held for over a year. You can google for capital gains index. You will get it for all years. SIP is a good tool in income/long-term debt funds. Vidya
Hi Vidya,
I would like to know whether Indexation benefit is available on NCDs (current SREI NCDs).
Hi Vivek,
it is available if sold in the market after holding for more than 1 year (where long term capital gain arises).
Hi Vidya,
Whether Indexation benefit is available for NCD (current SREI NCDs).
Good Day Vidya,
Please advise which ITR should I file for home loan and which section to be used in this case.
My mother gets interest from from the graduty amount which she got on retirement. Is this amount taxable?
Any feedback will be appreciated.
R/ Jashan
Hello Jashan, In your ITR, you ahve to show your home loan if you are claiming interest or principal. ITR1 is used if it is just 1 home and you do not have any capital gains from any investment. If you have either of the 2 I mentioned, then it is ITR2. thanks
Hi Vidya,
Thank you for the reply. Like principal amount will go in 80C, which section should I file interest in?
Thanks 🙂
Under Section 24B if it is self occupied (upto Rs 1.5 lakh) or if you have rental income then claim under Sec 24 – income from house property (no limit for interest here).thanks,
Hi Vidya,
One question from IT returns perspective –
Suppose we take the above scenarios of double indexation, say one invests Rs. 10,000.00 in a FMP in Feb 2014 and sells/encashes in Apr 2015 taking advantage of double indexing. Say the maturity value is Rs. 11,500.00.
In the financial year 2015, since the fund has been held for more than a year, do we have to disclose the gain at all? If yes )or even if no), how do we get the double indexation benefit…meaning, how do we disclose and seek back the indexation benefit.
You have shown what is double indexation with an example. Will help if you also illustrate how do we disclose the gains and then take the benefit from IT returns perspective…
Thanks,
Raj
Hello Raj, Capital gains have to be disclosed after doing the calculation. If there is a loss after calc. then that has to be disclosed. the blog link I have given in the article (of an earlier blog) – https://blog.fundsindia.com/blog/mutual-funds/make-use-of-indexation-benefit-for-debt-funds/1971
– will show you how indexation is done..it is no different for double indexation..just the year taken will be different. thanks,
Hi Vidya,
I have a tax related question (not directly related to the post):
If one invests in an ELSS (Tax Saving) scheme but does NOT avail of the relevant tax benefit (say because the 1 Lakh limit was already used due to PPF or other such investments), is there still a lock in required/enforced on the ELSS investment/scheme?
Thank you.
Narayanan.
Hello Narayanan, As far as I gather, the lock-in is 3 years, whichever way. Separately note that by investing in ELSS, youa re investing in equities and it is not a good idea to have a time period of less than 3 years in equities, any which way. tks, Vidya
Hi Vidya,
Whether Indexation benefit is available for NCD (current SREI NCDs).
Hello,
Thanks for providing the complete list. I did not know International Funds are eligible for this indexation benefit.
Are Feeder funds and Fund-of-Funds also eligible for this benefit?
Where to see the indexation numbers for each Financial Year?
And, please post an example calculation for this: separately for single and double indexation types.
Asides tax benefit, is SIP mode recommended for debt funds ?
Your blog posts are helpful in learning new frontiers & their benefits in investing.
Thanks very much,
Ranga
Hello sir,
thanks, yes all feeder and FOF funds also get indexation benefit if held for over a year. You can google for capital gains index. You will get it for all years. SIP is a good tool in income/long-term debt funds. Vidya
Good Day Vidya,
Please advise which ITR should I file for home loan and which section to be used in this case.
My mother gets interest from from the graduty amount which she got on retirement. Is this amount taxable?
Any feedback will be appreciated.
R/ Jashan
Hello Jashan, In your ITR, you ahve to show your home loan if you are claiming interest or principal. ITR1 is used if it is just 1 home and you do not have any capital gains from any investment. If you have either of the 2 I mentioned, then it is ITR2. thanks
Hi Vidya,
Thank you for the reply. Like principal amount will go in 80C, which section should I file interest in?
Thanks 🙂
Under Section 24B if it is self occupied (upto Rs 1.5 lakh) or if you have rental income then claim under Sec 24 – income from house property (no limit for interest here).thanks,
Hi Vidya,
I would like to know whether Indexation benefit is available on NCDs (current SREI NCDs).
Hi Vivek,
it is available if sold in the market after holding for more than 1 year (where long term capital gain arises).