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Make use of indexation benefit for debt funds

Cost inflation index benefit can make the post-tax return of debt funds far superior to fixed deposits.

With the financial year just ending, your next big task would be to calculate any tax on income other than your salary.
If you are sitting down to calculate your gains on debt funds that you had held for more than a year and sold in the just ended financial year, do consider the capital gains index or cost inflation index .

Long-term capital gains
Long-term capital gains (held over a year) on debt funds suffer a 10% tax without indexation or 20% with indexation benefit. In the case of the latter, by indexing, you bring your cost of investment to the current value, after factoring general price rise for consumers.

Given that the capital gains index has been expanding at a good pace (see table below), courtesy inflation, using the index will likely ensure that you pay very little tax or nil tax on your gains.

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Let us take an example of a debt fund, say an income fund, that you bought for Rs 10,000 in 2011-12. If the fund returned 9% and you sell it for Rs 10,900, your long-term capital gain would normally be Rs 900. A 10% tax on this plus cess would be Rs 93.

But if you index the cost of the same with the CII for 2010-11 and 2011-12 and 2012-13, then the cost would be Rs 10,853.5 (10,000*852/785). So your gain, for tax purposes, would be Rs 46.5 (10,900-10,853.5). A 20% tax on Rs 46.5 will be just Rs 9.3.
With the same return, you may not even have to pay tax if you held the fund for say 2 years or 3 years, as the post-indexation cost will be higher than your sale value. For instance, assuming your returns were the same 9% annually, if you index your cost for 2 years, it would be Rs 11,983, as against sale value of Rs 11,881, resulting in a capital loss for tax purposes.

Hence, make a quick calculation of your gains post indexation before you pay your tax in the next few months.

Comparison with FD
See the tables below to know how indexation makes a debt fund a superior post-tax product compared with FD, assuming that they earn the same returns.
It is noteworthy that even if you are in the 10% tax bracket, your post-tax returns would be lower in a fixed deposit. The difference widens if you are in the 30% tax bracket. If you are not a tax payer, only then, you may benefit from holding FDs (depending on whether FD returns are superior or not to debt funds).

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105 Responses to Make use of indexation benefit for debt funds

  1. Jinny April 3, 2013 at 1:56 pm #

    HI Vidya,

    Please tell me how the units in the Liquid fund considered ? Is it last in first out (LIFO) or FIFO ?

    • Vidya Bala April 3, 2013 at 2:02 pm #

      Hi Jinny, It is first in first out. Tks, Vidya

      • Sumit April 3, 2013 at 2:18 pm #

        Vidya,

        The same applies for equities? I mean in terms of calculating the long/short term gains?

        Can we also recover the capital losses in the ITR?

        Thank you

        • Vidya Bala April 3, 2013 at 2:49 pm #

          Hi Sumit, Hope you know there is no indexation for equity funds as long term gains on equity funds are exempt from tax.

          You can set off your short-term capital loss from equity against short-term capital gain of both your equity and debt investments as well as long-term capital gains of debt (pl. note that long term capital gain on equity is exempt from tax. hence you cannot use it for set off purposes). Tks, Vidya

          • Manjunath January 6, 2014 at 1:08 am #

            Hi Vidya,

            Did you mean that we can set off a short term loss from equity with a long term gain on DEbt fund?

            Lets say I bought shares of XYZ in april 2014 and sell it off in may 2014 booking a loss of rs 1000. Now during the same financial year (2014-2015) if I have a LTCG from a Debt fund of 2000, can I set off the STCL of 1000 incurred in Equity? with that my total tax liability would be 1000 (I took the indexation part away for easy calculation)

            Please let me know if my understanding is right

          • Vidya Bala January 8, 2014 at 11:07 am #

            Hi Manjunath, yes, your understanding is right. Vidya

  2. Venkat April 3, 2013 at 3:56 pm #

    Madam

    Would the increase in DDT for Debt funds effect the returns on Growth category Debt funds, if held over one year, either in the hands of the fund or the buyer.

    Thank you

    Venkat

    • Vidya Bala April 3, 2013 at 7:13 pm #

      Hello Venkat, DDT is charged for dividend option of a debt fund. There is no DDT for growth option as there is no dividend paid here. Only the capital gains, at the time of sale will be taxed as usual. Hence, budget does not change anything for growth option. tks, Vidya

  3. Sheetal April 7, 2013 at 9:51 pm #

    Hi Vidya, in the Reports section available in FI can columns for both 10% and 20% with indexation also be added so that we are saved some time looking up the CII and calculating manually? Thanks.

    • Vidya Bala April 8, 2013 at 9:35 am #

      Hi Sheetal,
      I suppose you mean the capital gains statement. If so it is meant to merely showcase your gains or loss and not to calculate tax. This is because many people may be availing offs or other tax adjustments and cannot directly calculate tax on the gain. But I shall certainly forward your suggestion to our tech team. Tks, Vidya

  4. Krishnan April 8, 2013 at 9:18 am #

    How to calculate tax in case of MIPS (say Reliance MIPS) when interest is credited every month
    HOw does indexing work in such cases

    Thanks

    Krishnan

    • Vidya Bala April 8, 2013 at 9:32 am #

      Hello Krishnan, MIPs receive the same tax treatment as any other debt fund.

      I am not sure if you meant dividend payout or dividend reinvestment. In both cases, as long as it is long-term capital gain indexation will apply. But it is unlikely that you will have any gain. You will have a capital loss that can be set off against capital gain. But as far as the cost in dividend reinvestment option is concerned, for the additional units allotted, the NAV at which it was allotted (as dividend reinvested units) should be considered for indexing purposes and not the original cost of your investment.
      But do remember that your dividends also indirectly suffer tax by way of DDT.
      Tks, Vidya

  5. Hemant April 8, 2013 at 10:16 am #

    Dear Vidya,
    Indexation is something which can benefit lot of debt fund users to a great extent more so if they fall in highest income tax bracket.
    However, to my great dismay, there is huge lack of unedrstanding and awareness of this benefit amongst the AMC executives themselves as well as CAMS which services a large chunk of AMCs. The CAMS has been generating a grossly incorrect capital gains statement for my folios for quite sometime (few months). This is because they have been calculating incorrect indexed cost in some cases whereas in some cases (withdrawal from liquid fund after one year) they are not applying indexation at all. I am specifically mentioning this as there was a query from reader askingif it applies to liquid fund as well. If an institution like CAMS does not know this fact, then it is natural for ordinary investors like us to have this doubt.
    After a serious follow-up, CAMS has given me telephonic asuanrance to rectify it for one of the AMCs. At the same for another AMC, CAMS executive has intimated me by e-0mail that indexation is not applicable to things other than FMPs.
    So those who get enlighetened by Vidya’s article and look forward to availing the indexation benefit, please ensure to prepare an excel sheet for all such investments using the CII table and calculate it on your own. Most of the AMC websites as well as CAMS is generating incorrect and incoherent capital gains statement in case of debt funds. I am yet to analyse similar statements for AMCs services by Karvy.
    Regards
    Hemant

    • Vidya Bala April 8, 2013 at 11:01 am #

      Hello Hemant, Thanks for sharing your experience. I hope other readers too become sensitised to this issue that you have raised.

      The capital gains statement generated by CAMs or Karvy, should best be used for the limited purpose knowing one’s gains. In other words it is a ‘capital gains’ statement and not ‘capital gains tax’ statement. It is best that the investor or his/her auditor does the indexing and tax part and not depend on external parties. Any error, especially understating can prove to be costly.

      Tks, Vidya

  6. apoorv April 8, 2013 at 10:29 am #

    I think there’a a mistake in the example:

    You wrote: “cost of the same with the CII for 2010-11 and 2011-12..”. It should be “cost of the same with the CII for 2011-12 and 2012-13″. The calculation itself is correct, only this text is not…

    • Vidya Bala April 8, 2013 at 10:56 am #

      Thanks for pointing it out Apoorv. it is 2011-12 and 2012-13. I have corrected it. Tks, Vidya

  7. Amit April 8, 2013 at 10:51 am #

    Dear Vidya,

    I am account holder in FundsIndia and a regular reader of ur articles.
    I have 8 IFCI 7.85% Infra bonds @ Face value of Rs 5000 i.e.Rs 40000 which was invested in FY 2010-11 for availing tax benefits u/s 80ccf. It had a lock in period of 5 yrs with an option to buyback after 5yrs or sell off. I have taken maximum benefit of 4 bonds in my return.
    Recently i checked its value in demat holding. It showed Rs around Rs 32000 per bond. i.e. 6 times its cost in just 2 years.
    I had some queries-

    How and where can one sell these bonds after 5 years if the price is similar i.e. around 32000.
    If it is not sold after 5 yrs, then IFCI will give normal FV and interest thereon to the investor?
    Can i sell the bonds which i have excess purchased above Rs 20000 limit now? If yes, then how?

    Looking for a positive response.

    Thanks,

    Amit

    • Vidya Bala April 8, 2013 at 4:22 pm #

      Hi Amit, Do you hold the series I (FY-11) 10 year bond with cumulative option? We assume it is , going by the coupon rate you have mentioned.
      I checked their current market price in BSE. It was Rs 6000 a bond. That roughly tallies with 2 years of accumulated interest on it. Pl. check as to how their price is captured in demat. Many of the debt instrument prices cannot be captured properly as they are hardly traded in the retail debt market segment.
      As these instruments are very thinly traded in the stock market and is hence not easy to get out by trading in the market. You can try checking with your broker about its tradability after 5 years. But remember you will have capital gains tax if sold in the market.
      Details of the buyback and the amount you will get are given by IFCI in this link: http://www.ifciltd.com/InvestorsSection/Bondholders/InfrastructureBonds/SeriesI.aspx I hope this is the series you applied for. There are multiple series that the company issued.

      tks
      Vidya

      • Amit April 8, 2013 at 5:02 pm #

        Dear Vidya,
        Thanks for the reply.
        Yes i have the same bonds cumulative option but with buyback option after 5 yrs.
        However the value of one bond as per CDSL today is shown as Rs 30958/- Please click the link below:

        http://www.cdslindia.com/investors/popup-isin.jsp?isin_code=2336-2496-2208-1536-1632-1824-2080-1536-1792-1568-1600-1600&isin_name=IFCI%20LTD-7.85%UNSEC%20RED%20IFCI%20LONG%20TERM%20INFRA%20(BUYBACK/CUM)%20NCB%20SR-I%20OPT-II%20PN%20PP%20LOA-RD%20DT15.09.2020

        Its really strange that the value of bond has shot from Rs 5000 to Rs 30958 in just 2 years even if it is thinly traded?

        How can BSE show different price than CDSL? Further, my application to convert my demat account into BSDA account was rejected as they told my portfolio value is above Rs 2 Lakhs solely because CDSL captured value of IFCI bonds Rs 2.4 lakhs as compared to Rs 40000/- (cost).

        Further, do brokers like indiabulls really help in selling these tax saving bonds even if we have not bought it through them?

        Thanks,

        Amit

        • Vidya Bala April 9, 2013 at 10:03 am #

          Hello Mr Amit, Thanks for the further details given. I was looking at the wrong series. The data your provided helped me check the right one: http://www.bseindia.com/stock-share-price/ifci-ltd/ifci150910b/972609/
          As you said, it is indeed at Rs 30958 and odd. But the last traded price was aug 2012 after which trading has been suspended. i believe there has been some freak trade that has resulted in the price jumping and therefore also causing suspension. You will not be able to sell it for now. You may watch out for revival in trade ..check the BSE website (debt section) with scrip code 972609. In any case your lock-in is 5 yrs as it is an infra bond.
          Now, your question on selling – if you have a demat account, there must be a brokerage house/bank through which you would have opened the demat. If you are going to sell in the open market, you can do so only with a brokerage account. Hence, check with them to see if they evince interest (when you decide to sell after 5 yrs) in helping you put through this trade. Otherwise, simply hold and get the payment directly by opting for buyback. But be assured that the amt captured here is artificial and will not be the amount you will get. As to why this happened, you will have to contact CDSL or IFCI to know details. tks, Vidya

          • Amit April 9, 2013 at 11:00 am #

            Thanks Vidya for the elaborate reply..

            Another query-

            If an individual want to invest in some instrument apart from equity, may be mutual fund, bond, debenture etc.. which one you will recommend in the current market scenario with a investment horizon of 2 years. If an individual is in 20% tax bracket, then max one can expect 7%(post tax) returns from FD. However if he desires to better the post tax returns to atleast around 10% considering liquidity is not a concern, which instrument you will recommend? Less exposure to equity is desired.

            Thanks,

            Amit

          • Vidya Bala April 9, 2013 at 8:18 pm #

            Hello Amit, Post tax of 20%, FDs will yield 6.8-7% now. Bonds and debentures with good credit rating may deliver only very marginally higher than this in a falling interest rate scenario.

            But you can expect marginally higher returns from income funds. However, your returns of 10% may be tough to achieve in a pure debt fund. Even if we consider debt-oriented funds like MIPs, this returns is possible only when equities perform well. Given the current scenario, 2-years is too short a time frame to say whether this is possible with certainty with 25% equities. Fortunes of equities will solely determine returns and that is a tough forecast to make at this stage. In general, in the short term return expectations are best kept muted. – tks, Vidya

          • Amit April 10, 2013 at 12:25 am #

            Thanks Vidya…

            What are income funds exactly?

            Further can FMP be a better option?? Indexation benefit is available so that the CG minimizes a lot…Ofcourse we have missed double indexation benefit available in last week of march..

            Thanks,

            Amit

          • Vidya Bala April 10, 2013 at 12:12 pm #

            Hi Amit,

            1. Income funds are a class of debt funds that try to manage their credit and itnerest rate profile based on debt market scenarios. The article I quoted has everything about income funds. I am quoting from that, but do pl. take a look at it:
            “Income funds are a class of debt mutual funds that invest in a combination of government securities, certificates of deposits, corporate bonds and money market instruments. They are managed by expert fund managers who actively try to manage the portfolio based on interest rate movements, while at the same time keeping the portfolio credit worthy.
            In other words, they seek to generate returns both in declining and rising interest rate scenarios by managing their portfolio actively. They either generate interest income by holding the instruments till maturity or manage gains by selling them in the debt market if the price of the instrument rallies well.
            That means that these instruments will not guarantee you fixed returns like deposits. Yet, over the last 10 years, they have beaten three-year deposit rates, irrespective of the year in which you invested. Let us look at income funds’ features and how they score over fixed deposits.”

            2. Income funds can be better options to FMPs if your risk appetite is slightly more. FMPs decide the instruments to invest in and hold them till maturity while income funds dynamically manage the portfolio based on interest rate movements. FMPs are close ended while income funds do not have such lock-in. They are open ended and may at best have exit load if exited before specified time period. Income funds too (for that matter all debt funds) have indexation benefits if held for more than 1 year. Double indexation benefit will be available for any debt fund you invest towards close of financial year and not just FMPs. Just that FMPs with a 370 or 400 day tenure are timed just before FY-ending to highlight double indexation benefit. Youc an d the same by investing in a regular open-ended debt fund. Tks, Vidya

  8. Nimesh April 8, 2013 at 12:29 pm #

    Hi Vidya,

    When redeeming the debt funds after 1 year or more does investor have the option to choose – with/without indexation being applied on his investment ?

    Thanks,
    Nimesh

    • Vidya Bala April 8, 2013 at 2:51 pm #

      Hello Nimesh, yes, you have the option to choose whether to go for indexation or not. tks, Vidya

      • Debojyoti September 14, 2013 at 5:21 pm #

        Hi Vidya,
        I had a question, How can we go for the indexation option, how can I communicate to the AMC. For eg I have invested in sbi mf so what I need to do to work out the indexation.

        • Vidya Bala September 17, 2013 at 1:00 pm #

          Hi Debojyoti, You need not communicate it to the AMC. If you hold for more than 1 year, you need to decide whether to go for 10% capital gains tax (on the gain), without indexation or index it and tax at 20% (pl search on the internet, you will get enough dope on how to index the cost using the capital gains index). The AMC is not going to deduct capital gains tax and hence it is for you to do it. As for knowing what is you gain, if you have a FundsIndia account, you wills ee the gain classified neatly as short term or long term. Thanks.

  9. Saurabh April 8, 2013 at 12:47 pm #

    Hello Vidya – My question is not related to this post may be. But would you be able to tell me how long-term RDs are taxed? i assume there is no TDS on RDs and only interest is taxable, if this is true, then how exactly the tax will be calculated? Will the interest earned be included in my yearly income and will be taxed as per the tax slab applicable? please let me know, many thanks in advance

    • Vidya Bala April 8, 2013 at 2:50 pm #

      Hi Saurabh, Interest on RD does not have TDS but is taxable. The interest, in the year of maturity, is added with your total income under the head ‘income from other sources’ and taxed according to your slab rate. There is no separate tax treatment. You will either have to disclose it to our employer as part of other income or pay your own self assessment tax before or when you file your annual tax returns. tks, Vidya

  10. Anjani Singh April 9, 2013 at 11:02 pm #

    Hi Vidya,

    Extremely good and Timely post. I have 2 questions: –
    I have setup STP from FundsIndia on various debt funds (Daliy Dividend) to respective Equity Fund in the same fundhouse. If I convert the Dividend funds to Growth Funds, Will the STP have to be recreated and what will be the taxation situation considering:
    1. STP begins for the next week onwards
    2. STP begins after 1 year

    Regards,
    Anjani Singh

    • Vidya Bala April 10, 2013 at 12:24 pm #

      Sir,

      Converting from dividend to growth option is like exiting and entering afresh. Hence, check for capital gains etc, if any (unlikely since you have a daily dividend running). Yes, you will have to stop the STPs and start a fresh STP on the growth option of the debt funds.
      1. as far as the debt fund is concerned the day of moving them to the growth option will be the date of purchase. Any exit/STP from the fund within one year of such purchase (as growth fund) will be taxed at your income tax slab rate.
      2. If the transfer is made after one year, the tax will be 10% without indexation or 20% with indexation. But pl. remember in case you put more money in the debt fund later, the order of exit/transfer is first in first out. Money which came in first will be treated as having exited first.
      tks,
      Vidya

  11. Vishal April 10, 2013 at 9:28 pm #

    Hi,

    As and NRI status i do hold couple of Debt/Liquid funds.How do i take the advantage of indexation.This can be done while filing return or is there any way out.But the problem is as soon as we sell any units it proceeds is net of TDS.Please advise.

    • Vidya Bala April 11, 2013 at 9:50 am #

      Hello Vishal,

      TDS is deducted flat by the AMC. There is no way they are going to consider indexation benefit. Hence, it is for you to compute your actual gains and tax after indexation at the time of filing returns. This is indeed a limitation as often times your actual tax (after indexation) would be lower than the TDS and entail a refund, if you do not have too many other sources of income here. Tks, Vidya

  12. ASWANTH April 13, 2013 at 10:24 pm #

    Hi,

    Thanks for the nice article. I have two queries.

    1. Can we calculate the capital loss if the indexed value is more than the returns in debt funds on long term investment in ITR.
    2. If i purchase a debt fund in March 2011 and sold it in April 2013, I have to calculate indexation for two years or three years.

    Thanks,

    Aswanth

    • Vidya Bala April 14, 2013 at 10:29 pm #

      1. yes, you can have a situation of capital loss if the sale value (total proceeds you get from selling units) is less than the indexed cost. But such loss can be set off only against other capital gain and not against your regular income.
      2. You will get benefit for 3 years.
      Tks
      Vidya

  13. Barkha April 22, 2013 at 11:13 am #

    Hi,

    Was planning to invest fd amount in Birla Medium term plan for time frame of 2 years. shall i proceed.
    what can be other options.
    I am looking for return of 9- 9.5 post tax.

    Thanks

    • Vidya Bala April 22, 2013 at 12:12 pm #

      Hi Barkha,

      I hope you are aware the Birla Sun Life Medium Term Plan is a high risk fund given that it takes credit risk. Hence, it is not a substitute for FDs.

      Pl. read our review on this fund, in case you wish to know more: http://www.fundsindia.com/blog/mutual-funds/fundsindia-reviews-birla-sun-life-medium-term-plan/1778

      Based on this fund’s current returns, a post-tax return of about 9.0-10% (if you hold for more than 1 year) may be feasible. In FD you post-tax return at 30% tax would currently be about 6.4% for 2 years (interest compounded quarterly and under cumulative option) For fund suggestions, kindly use our Ask Advisor feature (in your FundsIndia account) and give your detailed requirement so that our advisor can write back or talk to you.
      Tks,
      Vidya

      • Barkha April 24, 2013 at 4:00 pm #

        Hi,

        Time frame can be 1 year minimum -2 years or even longer.I was withdrawing the bank interest quarterly hence i expect same in mutual funds. I would be satisfied with 9+ returns.

        Please suggest me the funds.

        • Vidya Bala April 24, 2013 at 4:17 pm #

          Hi Barkha,
          Pl. be aware that there can be no surity in returns like the way banks give. We only go by the portfolio and present performance of the funds. Also, remember, you cannot rely on mutual funds to declare assured returns every month or quarter. they may declare based on surplus, but there is not mandate to declare. Hence, while mutual funds are ideal for wealth building (that is buy and hold for long term, without wanting any regular income in between), if you wish regular income payout then you should allow the fund to grow for a couple of years and then use a systematic withdrawal plan, where you get to take a fixed amount out, every month or quarter. Fund suggestion requires, knowing risk appetite, current investments, time frame and investment amount. Hence, we normally take fund questions through our Ask Advisor Feature (mail or schedule a call), which is available free in your FundsIndia account. Tks, Vidya

  14. Kumar May 7, 2013 at 3:26 pm #

    Hi,

    How do we pay any such tax on debt funds? Do we have to file IT return using some special form? Can you give an example of such return with details to be mentioned in there?

    Thanks

    • Vidya Bala May 8, 2013 at 11:05 am #

      Hello Kumar,

      At the time of filing your returns (before due date), you will have to pay self assessment tax on any gain you have in debt funds (it is like any other tax you will pay on other income such as interest income etc). Your ITR V form, online or offline will have a provision to submit details of capital gains. You can also use the tax calculator available in the iNcome tax dept. website: http://law.incometaxindia.gov.in/DIT/Xtras/taxcalc.aspx

  15. Kumar May 14, 2013 at 4:38 pm #

    Hi Vidya, how do we decide whether to use index or without index for calculating long term capital gains for any asset? From where can we get index values for the applicable years?

    • Vidya Bala May 14, 2013 at 8:10 pm #

      Hi Kumar,

      All you need to do is index your cost first (cost*index value in yr. of sale/index value in yr. of purchase). Refer our article for index values: http://www.fundsindia.com/blog/mutual-funds/make-use-of-indexation-benefit-for-debt-funds/1971. If your sale value less indexed cost is a loss, you simply need to take indexation benefit. If this is a profit, then calculate 20% tax on this. Then, without indexing, calculate 10% of capital gain (sales value less cost).
      If the 20% tax on capital gains after indexation is lower than the 10% tax (without indexation), then you need to go for indexation.

      tks
      Vidya

      • Kumar May 15, 2013 at 2:10 pm #

        We get to choose whether to use indexation or calculate without indexation? Are returns always better with indexation?

        • Vidya Bala May 15, 2013 at 3:04 pm #

          Hi Kumar, yes you have the option of choosing. Indexation need not be always better. It depends on whether the inflation index is growing high every year. If inflation index is flat (in periods of very low inflation), you may not benefit much.

          Vidya

  16. Sum May 16, 2013 at 4:24 pm #

    Would it be wise to sell blue chip shares and reinvest in debt funds in the current scenario – as a long term investment are the shares better or are debt funds better ?

    • Vidya Bala May 17, 2013 at 1:45 pm #

      Hi, as a long-term investor, bluechip shares will make immense sense over debt. We would not recommend that you sell blue chips for debt. But ensure you always have a good mix of equity and debt to provide good hedge and reap benefits from both. Tks, Vidya

  17. Kumar May 17, 2013 at 2:56 pm #

    Vidya, can you recommend some debt fund please with horizon of 1 to 1.5 yrs?

  18. Sumit May 20, 2013 at 2:17 am #

    Hello Vidya, considering that we are in falling interest rate environment, would it be wise to invest in a income fund for 1 to 2 yrs and expecting a post tax return of 10 %.? DO income funds invest in corporate bonds and debentures as well?

    Considering that the investor has a lower to medium risk appetite and falls in 10 % tax bracket, which fund (having no allocation to equity) would you recommend ?

    Thanks, Sumit

    • Vidya Bala May 20, 2013 at 8:03 pm #

      Hello Sumit,

      Thanks for writing in.
      In general, irrespective of interest rate cycle, income funds require a 2-3 year time frame to deliver well with limited risk. In the time frame you mentioned short-term funds are a better choice. A 10% return may be possible in exceptional interest rate fall cycle (where rates fall sharply triggering price rally). But as we are likely to have a gentle slide hereon, this returns is possible only when funds take credit risk too. Very few funds do that. So to answer your question, is its not too easy.

      Yes, income fund very much invest in corporate bonds and debentures. In fact that is typically their largest holding.
      You may refer to our select funds http://www.fundsindia.com/select-funds to choose your funds from our select list or alternatively use our Ask Advisor feature on the net (available for all our investors) so that our advisors can help determine the right funds for you.
      Thanks, Vidya

  19. Sunil May 25, 2013 at 2:29 pm #

    Thanks for this article. I am little new to investing in funds so please pardon my ignorance. Who would do this indexation for tax returns? Is it me? Also, do you suggest there are 2 options – 10% long term gains tax or 20% with indexation? It left me little confused.

    • Vidya Bala May 26, 2013 at 8:21 pm #

      Hi Sunil, Yes, you will be the one choosing which option to go for – that is 10% without indexing or 20% with indexing. The best way to find out is to calculate. The time period of holding and how inflation index has grown will determine which one of these options is better. On years when the inflation index is very growing slowly, then the 10% option may turn out to be better. Take a look at the example in the article to know how tax under the 2 options are calculated.
      tks, Vidya

  20. VikasG June 9, 2013 at 3:25 am #

    Hi Vidya,

    Very well written and super informative. Fundsindia is really lucky to have you.

    You said: “The article I quoted has everything about income funds. I am quoting from that, but do pl. take a look at it”

    I am not sure about the article. So, posting my very naive query about growth option of income funds:

    1) Do they pay dividends?
    2) Do they pay periodic interest (maybe annual or more frequent)

    If both the above are true, then is it correct to say that the only tax liability will be at the time of selling the fund (capital gains)?

    Thanks.

    • Vidya Bala June 9, 2013 at 7:11 pm #

      Hello Vikas,
      Thanks!

      To answer your question:

      1. Growth option itself means that no dividends are paid out. The profits are allowed to accumulate
      2. There is no concept of interest in mutual funds

      The tax liability is certainly the capital gains, which is nothing the profit that accumulates in the NAV.
      Thanks, Vidya

      • VikasG June 10, 2013 at 11:03 pm #

        Thanks for confirming.

  21. VikasG June 10, 2013 at 11:05 pm #

    Hi Vidya, I know this might be complicated but can you give us some sense of how the debt fund’s NAV is calculated. Who decides that the NAV should go up if the interest rates go down?

    • Vidya Bala June 11, 2013 at 2:31 pm #

      Hi Vikas,

      NAVs move based on the value of underlying investments, which could be equity stocks or debt instruments. Hence, if stocks move up, the sum total of the movement in that portfolio is reflected in the NAV. Similalrly, when yields of respective debt instruments falls, their prices rally, thus reflecting in rally in the NAV and vice versa. From this, expenses incurred in managing the fund are deducted and the NAV that you see is captured. Hence, it is only the market – either equity or debt – that decides the NAV ultimately because all the money is invested in equity or debt market.

      Thanks
      Vidya

  22. Venkat July 3, 2013 at 5:22 pm #

    Hi,

    Trust indexation benefit is also available for redemption of Fund of Funds (FT India Dynamic PE Ratio FoF – Dividend payout option). While the dividends are considered exempt, no STT was deducted at the time of redemption. Therefore, is it ok if I consider indexed costs of acquisition and claim long term capital loss, adjustable against other long term gains.

    Regards,
    Venkat

    • Vidya Bala July 5, 2013 at 3:40 pm #

      Hello Venkat,
      FT India Dynamic PE ratio fund is a debt-oriented fund for tax purposes (not all FoF are debt-oriented). Hence indexation benefits are available. There is no STT on debt funds and that does not stop your from claiming indexation benefit. Thanks, Vidya

  23. lalith mohan July 8, 2013 at 1:30 pm #

    hello Vidya!
    Can the indexation be applied for general term deposits/fixed deposits in a nationalized or private banks?
    please send your reply to my mail if possible

    • Vidya Bala July 8, 2013 at 1:33 pm #

      Hello Lalith,

      Interest from deposits (banks or companies) are not in the nature of capital gains. Hence no indexation benefit is available for them. This is what makes mutual funds a tax-efficient product compared with traditional products

      • Mahesh July 13, 2013 at 3:11 pm #

        You said indexation benefit is not available for FDs as there is no capital gain. At the same time you said that indexation benefit is available for all debt funds. Does it mean that all debt funds have capital gains including UST, liquid funds and FMPs.
        Thanks

        • Vidya Bala July 13, 2013 at 3:46 pm #

          Hi Mahesh, Yes, all debt funds very much have indexation benefit if held for more than 1 year. This is what makes them superior to other debt products like FDs from a tax angle. Thanks, Vidya

  24. lalith mohan July 8, 2013 at 2:06 pm #

    I have noticed in a bank that they depreciate their interest rate for the deposits tenured 3-5 years. Why is it done? Is it because a deposit locked in for more than 3 years make it long term capital gain and can be indexed?

    • Vidya Bala July 8, 2013 at 2:16 pm #

      Hello lalith,

      Any interest income under the Income Tax Act is taxed in the respective slab rate. That means they do not come under capital gains purview. You may have to check with the respective bank as to the nature of the product you are mentioning and what is the treatment the bank gives to such product. There is a deposit called capital gains account scheme used for investing any ‘property capital gains’ to save tax. Interest from even this account is taxable like other interest. Hence pl. verify with the said bank. Thanks.

  25. Mahesh July 13, 2013 at 3:17 pm #

    Information provided is simple to understand and adds great value to our knowledge.
    Thanks

  26. Hardik July 17, 2013 at 6:54 pm #

    I sold my old (more than one year old) MIP mutual funds. I got the capital gains statement from cams/karvy website.

    Long Term Gain with Indexation is negative while Long Term Gain without Indexation is positive.

    1. As Long Term Gain with Indexation is negative, I believe I do not have to pay any tax.
    2. Where do I mention value of Long Term Gain with Indexation in ITR-2 form.

    • Vidya Bala July 18, 2013 at 9:01 pm #

      Yes, negative means capital loss. Hence no tax. But this can be adjusted against any long-term capital gain. See Schedule CG for capital gains and CYLA for set off, if any. Tks, Vidya

  27. Hardik July 19, 2013 at 3:13 pm #

    Thanks Vidya for clarification.

    One more thing, I have no other long-term capital gain to adjust against for the long-term capital loss. In this case, do I have to put details of long-term capital loss in the Schedule CG, or can I ignore and leave Schedule SG blank?

    I checked the ITR – 2 form, I believe I have to fill in details at B2 section of Schedule SG.

    a) Full value of consideration
    b) Cost of acquisition after indexation
    c) Cost of Improvement will be zero in case of Mutual funds?

    Thanks

    • Vidya Bala July 20, 2013 at 2:25 pm #

      Hardik, If you intend to carry forward the loss pl show it in Sch CFL (details of losses to be carried forward to future years).

      Tks, Vidya

  28. Nikhil August 1, 2013 at 11:07 am #

    Hi Vidya,
    Thanks for a very clear write up and such prompt responses to queries as well! I have a follow up question to an earlier query posted by someone on Long Term Capital Gains on Debt Funds with Daily Dividend Reinvestment option. Say I purchased 100 units in 2009-10 @ NAV of Rs 10, hence purchase cost Rs 1000. Since it is daily dividend reinvestment, the NAV stayed at Rs 10 and over the last 3 years the no. of units reinvested amount to 30. In 2012-13 I sell all 130 units at the present NAV of Rs 10, hence sale consideration Rs 1300. Questions:
    a) Can I apply inflation indexation to the original investment of Rs 1000?
    b) Can I also apply indexation to the 30 units reinvested in the 3 years of holding (taking each year’s CII separately)?
    c) Will the answer be any different if the result is a loss and not gain?

    • Vidya Bala August 1, 2013 at 3:35 pm #

      Hello Nikhil,

      1. If your holding is more than 1 year you can apply CII
      2. Yes, you can apply on addl. units but get their cost indexed separately. Also do not index addl. units that are less than 1 year. For this short-term capital gain will apply. Hence find out their cost and their Market value (no. of short-term units *NAV on sale) seprately.
      3. Loss or gain for tax purposes arises only after indexing (for holdings over 1 year). Hence, the answer will not be different.

      thanks

      • Nikhil August 1, 2013 at 9:10 pm #

        Thank you so much Vidya!

  29. Satyanarayana August 2, 2013 at 11:31 am #

    Hi Vidya,
    Could you help in how to fill short term gain in form ITR2?
    I have 3 different debt funds and I have gains from funds 1 & 2 and losses from fund 3.
    All these are short term. Now where do I report these details ?
    Thank you

    • Vidya Bala August 5, 2013 at 12:19 pm #

      hello Satyanarayana, all gains need to be added with total income and taxes calculated at your usual slab rates, along with salary income etc. thanks.

  30. sumaya August 11, 2013 at 4:18 pm #

    Hi,

    Why comparatively Bank Fds are less return then Mutual funds Debt Funds/FMPs ?

    • Vidya Bala August 12, 2013 at 10:25 am #

      Hi Sumaya, Mutual funds have the flexibility to move their investments according to rate and debt market conditions and may fetch higher returns when such calls favour them. FDs offer only fixed returns and hence there is no such flexibility. Thanks

      • sumaya August 13, 2013 at 8:25 pm #

        can u pls elaborate it with examples……

  31. rinku September 13, 2013 at 3:23 pm #

    Hi Vidya,

    A clarification required. Incase I invest in the FMP’s in the month of March for a 13 or 14 month tenure, Will I get a double indexation benefit??? Have the rules now changed wherein a person can take benefit of double indexation but has to stay invested in the scheme for the entire year rather than exiting in April or May???
    Thanks in advance

    • Vidya Bala September 13, 2013 at 3:25 pm #

      Hi Rinku, the rule is yet to change. You can get the benefit for now. thanks.

  32. sri September 21, 2013 at 11:07 pm #

    Hi,

    please explain how long term capital gains are applied for debt funds if I hold more than an year. Do I have to pay long term capital gain tax for every year for the interest I earned that year? or Do I have to pay only when I sold it? Does the AMC deduct TDS every year if I hold for more than an year?

    • Vidya Bala September 23, 2013 at 10:35 am #

      Hi, LTCG for debt funds held for more than 1 year is taxed at 10% on gains without indexation or 20% on capital gains arrived at after indexing the cost (you may refer the internet for capital gains index and how to calculate). It is taxed only in the year of sale. There is no interest that is taxed. it is only the capital gain. No TDS will be deducted for any mutual fund if you are resident Indian. Thanks.

  33. rapo October 11, 2013 at 9:56 pm #

    How should we calculate taxation if I only withdraw some of my money from debt funds after I hold it for more than a year. what is the tax rate if I hold it for less than a year.

    • Vidya Bala October 12, 2013 at 1:19 pm #

      Hello sir, Tax will be on a first-in-first out basis. The no. of units * their cost price will be your cost. This will be indexed using CG indexation. Then this value reduced from sale value will be taxed at 20%. You can also choose not to index the cost and opt for a 10% tax on gains. If you hold debt fund for less than a year, it will be taxed in your tax slab rate, whether 10,20,30%. Thanks.

  34. rapo October 11, 2013 at 10:11 pm #

    I am looking for one single debt class(just like FD) that will work in all economic conditions(say, high inflation and high growth to low inflation and low growth environment that is, current india and us situations).I don’t have knowledge to shift things when rates / economic situations change. I don’t want to invest in hybrid funds. Can I invest in liquid funds , ultrashort term funds and short term funds? Can I invest in ultra short and short term floating rate funds? how much I lose in the above funds(floating and non-floating) if interest rates are decreased from 8%(india) to 0.5%(USA) in a year? I think you forgot to mention three things in the above article:
    1. Only 1 lakh rupees of my money in a bank is safe(combined savings account balance and FDs) unless we have a sheila bair(ex-FDIC chairwoman) who ensures that nobody loses their FDs when banks go bankrupt once the flood gates to banking licenses are given. A bank a day may go bankrupt.
    2. FD breaking charges. They will shave 1% of my pre-tax FD money.
    3. There is no asset class that truly saves our money (from US treasury(they may not pay interest if they don’t agree on rasing debt ceiling) to real estate). we are back to square one just like old days when there is no capitalistic democracy.

    • Vidya Bala October 12, 2013 at 1:15 pm #

      Hello sir, thank you for your comments. Both Ultra short-term and short-term funds will generate reasonable returns with limited (when I say limited there could be some short-term volatility which tends to normalise itself if held for the duration for which the fund should ideally be held) risks. The chance of rates decreasing from 8% to 0.5% in India is nil. Any dip whether 1 or 2 percentage point at best, will result in a price (NAV) rally in these funds and not a loss.
      Thanks
      Vidya

  35. Venkat October 21, 2013 at 5:18 pm #

    Please advise if the losses incurred on sale of tax free bonds are tax deductible.

    • Vidya Bala October 21, 2013 at 7:44 pm #

      hi Venkat, If you sell them in the stock market, then any capital losses can be set off against any other capital gain that is taxable. But long-term loss has to be set off against long-term taxable capital gain. Short-term capital loss can be set off against other long or short-term capital gain.

  36. Vaibhav October 30, 2013 at 5:33 pm #

    Hi Vidya. Good article about the benefits of indexation. Is Birla Sun Life Short Term Fund (G) eligible for double indexation? In fact, when and on which document do you have to specify 10% non-indexed OR 20% indexed taxation option? Also, is it too late to benefit from double indexation this year?

    • Vidya Bala October 31, 2013 at 3:21 pm #

      Hi Vaibhav, Double indexation is not a separate benefit. It is the capital gains index benefit, you enjoy when you invest for a little over a year but enjoy 2 years’ benefit. So investments made closer to financial year ending (march) and exited soon after the close of the next financial year will enjoy double indexation, although not held for 2 years. yes, all debt funds will get it, based on the timing of your investment.Thanks

  37. Money Mazics December 4, 2013 at 5:33 pm #

    Good article..The data is presented well and properly articulated..
    http://www.moneymazics.com

  38. Raj Singh January 6, 2014 at 12:58 am #

    Nice post Vidya.

  39. Abhishek January 29, 2014 at 11:28 am #

    few questions –

    a) where do we get the chart from every year.
    b) do we have to mentioned somewhere that the tax calculated is after indexation. Eg. in Tax return.
    c) what is the generic formula to calculate the present value for funds held for more the 1 or 2 year.

    • Vidya Bala February 2, 2014 at 10:57 pm #

      1. You can google to get the index. 2. Yes 3. Cost of fund*index at the time of selling/index at the time of buying the fund.

  40. Kutub February 17, 2014 at 1:50 pm #

    Dear madam

    I have an option of 5 yr fmp from UTI AMC (1825) days pls let me know how many indexation benefit I will getting in this plan and also how effecient it is as compared to FD

    pls let me know
    thanks

    Kutub

    • Vidya Bala February 17, 2014 at 2:28 pm #

      hello Sir,

      Depending on which date you invested in you will have 5or 6 yrs of indexation benefit when the fund matures. Returns cannot be compared now as it will depend on the underlying instruments’ yield. They are likely to be better than FD on post-tax basis, if inflation remains high and you get high indexation benefits. We do not usually recommend long-term FMPs, given that we will not know the credit risk of instruments for longer tenure. To help us advice you, pl use the free ‘Ask Advisor’ feature if you have your activated FundsIndia account. thanks, Vidya

  41. Satyanarayana March 23, 2014 at 11:06 am #

    Hi Vidya.
    I invested in a debt fund with monthly dividend option about 23 months back (on 13/4/2012). As of now it has a small gain (in NAV) and I have been receiving dividends monthly.
    If I redeem now and apply indexation, instead of gain it is becoming loss,
    My questions are.
    1. Can i carry forward this long term capital loss?
    2. Do I need to account for the dividends I have received in the previous months while showing the loss?
    I am asking this because I do not know if dividend stripping is applicable in this case? If I add the dividends I received from this debt fund to the sale proceeds then the result will be back to capital gains (instead of loss).
    3. If I do not need to account the prior dividends in sales proceeds and if I can carry forward the losses because of indexation benefits, then I will sell in the next financial year so that there will be higher long term capital loss. Or else I will sell this week itself as I need that money now. Please comment.

    Thank you.
    Satyanarayana

    • Vidya Bala March 23, 2014 at 12:33 pm #

      Hi Satyanarayana,

      Yes, you can carry forward the loss and adjust against future gains. But disclose such loss at the time of filing this year to be able to carry it forward.
      2. No, you need not account for dividend income. dividends are taxed with the AMC (DDT). You need not account.
      3. Dividend stripping prevention provisions kick-in only if a person buys any units within a period of three months before the record date, sells such units within nine months after such date. This is not so in your case. So you can carry forward the loss.

      thanks,

      • Satyanarayana March 23, 2014 at 2:28 pm #

        Thank you Vidya for such a quick reply, that too on Sunday.
        Just to reconfirm from you – so I do not need to add even the last 9 months dividend in the sales proceeds. Right?

        Is this because DDT is already paid or is it because I am holding for longer than 12 months?
        Thank you.
        Satyanarayana

        • Vidya Bala March 23, 2014 at 2:31 pm #

          Hi,

          1. Because DDT is paid dividend is not taxable at your end, whatever be the tenure. It is exempt income for you.
          2. And because there is not dividend stripping, there is no need for adjustment of dividends against capital loss.

          Thought I will answer as you may have to take a decision before Fin. yr ends :-) thanks, Vidya

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