Investment in Debt Mutual Fund, Gold, Real Estate: How indexation works..?

Investment in Debt Mutual Fund,

Gold, Real Estate:  

How indexation works..?

Indexation is a process by which the government compensates

investors in debt, gold, real estate etc so that the investor does not have to incur any loss in real terms.

Due to inflation, the market price of an asset may not reflect the real value of the asset.

So, if the government taxes an investor going by the market price, that may turn out to be a disincentive to invest. Hence government allows inflation-adjusted selling price to determine the capital gain for incidence of taxation on the seller.

● Capital gain =

(Selling price at market value – Inflation-adjusted purchase price)

● Inflation-adjusted purchase price =

Original purchase price (Consumer inflation index for the year of

sale/Consumer inflation for the year of purchase)

● Suppose an investor had bought a house for Rs. 5 lakh in 2000 and sold it for Rs 10 lakh in 2010.

● Government data shows in 2000, CPI was 406 and in 2010 it was 711.

● So the person’s indexed purchase price will be about Rs 8.76 lakh.

● So the person’s capital gain will be Rs 10 lakh – Rs 8.76 lakh = Rs 1.24 lakh.

● His / her tax will be calculated on Rs 1.24 lakh. In the absence of indexation the tax would be calculated on Rs. 5 lakh,

that is on (Rs. 10 lakh – Rs. 5 lakh).

● Debt mutual funds enjoy benefits of indexation when held for more than three (3) years

From UTI MF - Swantra  

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