Decoding-Debt-Funds-July-10-2019

Indexation Benefit
• Indexation allows to adjust gains after taking inflation into consideration
• Helps to earn better post-tax returns if held for more than three years
Indexation benefit
Traditional Debt Products
without indexation benefit
Debt Fund
with indexation benefit
Initial Investment @ 8% for 1203 days (> 3 years) (A) 100,000 100,000
Amount at Maturity (B) 128,873 128,873
Indexed Cost* (C) NA 113,780
Capital Gains = (B-A) for (I), (B-C) for (II) 28,873 15,093
Tax Rate** 31.20% 20.80%
Taxable Liability 9,008 3,139
Post Tax Amount 119,864 125,733
Post Tax CAGR 5.65% 7.19%
Assumption - Investment was done in FY15-16 and redeemed in FY19-20. Hence the investor got the benefit across 5 financial years.
Note - The above illustration is hypothetical and is only for the purpose of explaining the concept of indexation benefits for Resident Individual / HUF. Return calculation is assumed and actual returns may
vary. *. For arriving at the indexed cost of acquisition, we have assumed that the investment is done in FY15-16 and redeemed in FY 19-20. CII is: FY15-16: 254, FY16-17: 264, FY17-18: 272, FY18-19: 280
and FY19-20: 289 ** Highest tax rate of 31.20% is taken into consideration, the tax rate is 20.80% in case of indexation benefit. 0% surcharge rate is considered for the above illustration. Surcharge in case
of Individual/HUF is levied at rate of i) 10%, where total income exceeds Rs 50 lakhs but does not exceed Rs 1 crore, ii) 15%, where total income exceeds Rs 1 crore but does not exceed Rs 2 crores , iii)
25%, where total income exceeds Rs 2 crores but not exceed Rs 5 crores, iv) 37%, where total income exceeds Rs 5 crores.
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