Tax-free returns from indexation in debt funds
How do you feel if you have made a profit on your investment, but do not have to pay tax on it or the tax payable is only on the partial profit made from the investment? You may want to know how this could be possible.
Long-term capital gain on debt mutual fund offers indexation benefit. If you invest in the debt mutual funds and the holding period is more than a year, the income from it will be treated as long-term capital gain. It will be taxed at 10%, or 20% with indexation benefits.
Under indexation, the cost of investment is raised to account for inflation for the period the investment is held. Indexation gives a benefit of cost inflation index (CII), which takes into account the effect of inflation and reduces the value of gains by increasing the value of the purchase amount. This helps reduce the tax amount. It's the government’s way of keeping the real value of money. The longer the holding period of debt fund, the bigger is the indexation benefit. Moreover, there is also o TDS in debt funds for resident Indians.
How indexation works
If you invested R1 lakh in debt
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