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Double Indexation: Maximizing Returns and Minimizing Tax Impact

Indexation is defined as adjusting the purchase price of your asset (essentially your investment) to reflect the impact of inflation and the capital gains are taxed accordingly.

  • How do you Calculate Indexation?

    All you need to reduce the taxes payable on your capital gains, are the following numbers:

    1. Cost of Inflation Index (CII). This is released every year. e.g.: 2010-11 : 711 2011-12 : 785 2012-13 : 852 2013-14 : 939

    2. The amount invested and

    3. The amount on Maturity

    Once you have all these numbers, you will need a simple equation to calculate your indexed capital gains. The equation is expressed like this :

    How do you Calculate Indexation? Example

  • E.g.: If you had invested Rs. 10,000 in a FMP on 1st April 2011 which matured for Rs. 11,100 (interest @ about 11%) on 1st April 2012, then you will calculate your capital gains tax with indexation like this:
    • 10,000 x (852/785) = 10,853 (Indexed capital amount) Thus 11,100-10,853 = 247 (Total capital gain) 247*20 (20% long term capital gains tax)/100 = 50 will be shown in Annual return of tax as Long Term Capital Gains.

    • Still the effective rate of interest post tax will be about 10.50%

  • Double Indexation

    • Now there is another concept called Double Indexation, the reason for which Fund Houses launch FMPs in the month of March.

    • Double Indexation means that the indexation benefit is available for 2 years even if you have invested one day or one month before a financial year ends.

  • Confused?

      E.g.: If you had invested Rs. 10,000 in a FMP on 31st March 2011 which matured to Rs 11,100 on 1st April 2012, then this means that you essentially invest in FY 2010-11 while the investment matures in FY 12-13.Thus you will calculate your capital gains tax with double indexation benefit will be like this:

    • 10,000 x (852/711) = 11,983.

    • In this case, the actual return for the purpose of taxation will be 11,100 - 11,983 which will be negative and hence no capital gain tax to be paid.

    • It is important to note here that timing your investments is crucial to make this method work effectively for saving your taxes.

    • Hence, as interest rates are currently on the higher side, it would make sense for conservative investors to invest into FMPs which comes with the double indexation benefit. These FMPs will not only help the investor to take advantage of the high interest rates but will also be beneficial from taxation point of view.

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Disclaimer: The views expressed herein are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information / data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risk and uncertainties that could cause actual results, performance, or event to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in the future. LIC Mutual Fund Asset Management Ltd. / LIC Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investment made in the scheme(s). Neither LIC Mutual Fund Asset Management Ltd. and LIC Mutual Fund (the fund) nor any person connected with them, accepts any liability arising from the use of this document. The recipients before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.

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