Indexation & LTCG in debt funds – some examples

I was very pleased with some of the feedback that I received on my post on A layman’s guide to capital gains and indexation. Many people said that they had not understood it earlier and were now much wiser after reading the post – that was, of course, the whole purpose of the post. Some readers, however, said that they would have been happier with some examples of debt funds. In this post I will attempt to do just that.

Let me first take an example of a fund that was redeemed in 2013-2014 FY. Note the below carefully:-

  • Fund is ICICI Prudential FMP Series 60 – 18 months Plan B – Cumulative.
  • FMP purchase of 20000 units @ 10 Rs done on 9/11/2011. Total investment 2,00,000 Rs
  • Fund maturity on 17/5/2013 with NAV of 11.44. Total amount received was 2,28,864 Rs
  • Absolute Capital gain was therefore 28,864 Rs
  • In the relevant FY, LTCG of Debt funds were after 1 year so indexation was allowed for this.
  • Indexed purchase value was 2,39,245 Rs and therefore there was a capital loss of 10,371 Rs
  • Now, if you were having the same transaction today, the absolute capital gain of 28,864 Rs will be treated as STCG as the holding period is less than 3 years and the tax on it will be 9500 Rs if you are in the highest bracket.

Let me now take an example from the 2014-2015 FY. Note the below carefully:-

  • Fund is DSP BR Dual Advantage Fund – Series 1 – 36 Months Growth
  • FMP purchase of 20000 units @ 10 Rs done on 6/3/2012. Total investment 2,00,000 Rs
  • Fund maturity on 12/3/2015 with NAV of 15.28. Total amount received was 3,05,664 Rs
  • Absolute Capital gain was therefore 1,05,664 Rs
  • In the relevant FY, LTCG of Debt funds were after 3 years so indexation was allowed for this.
  • Indexed purchase value was 2,60,891 Rs and therefore there was a LTCG of around 45000 with indexation.
  • The tax to be paid on this will be @ 20 % or 9000 Rs.

Finally let me take an example from the current FY 2015-2016. Note the below carefully:-

  • Fund is ICICI Prudential FMP Series 63 – 3 Years Plan L – Cumulative.
  • FMP purchase of 20000 units @ 10 Rs done on 3/7/2012. Total investment 2,00,000 Rs
  • Fund maturity on 6/7/2015 with NAV of 12.93. Total amount received was 2,58,676 Rs
  • Absolute Capital gain was therefore 58,676 Rs
  • In the relevant FY, LTCG of Debt funds were after 1 year so indexation was allowed for this.
  • Indexed purchase value was 2,40,375 Rs and therefore there was a LTCG of 18,301 with indexation.
  • The tax to be paid on this will be @ 20% or 3660 Rs.

In the earlier post we had already shown how to calculate the indexed purchase value of the asset by using the Cost Inflation Index of the sale and purchase year. What is the extra learning that we can get from these examples? Note the final two examples. You will see that the absolute capital gain in one case is 1,05,000 Rs and in the other case it is 58,000 Rs. Why is this so? There can be many reasons for this but think of a few such as :-

  1. The FY was different and therefore the rates of Government papers where most FMP invest in were different.
  2. DSP BR Dual advantage scheme has somewhat different kinds of holding as compared to the ICICI FMP.
  3. Plain luck on the investments of the DSP BR fund manager.

Note also, that the indexed purchase price is almost the same in both cases. This means that the growth in CII between 2011 and 2014 matches the growth in CII between 2012 and 2015. However, going forward this will be declining. In the next post, I will try to outline how these may change in the future and how it will affect LTCG, indexation and therefore the effective taxation and yield.

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3 thoughts on “Indexation & LTCG in debt funds – some examples

  1. For safe & secure retirement, think of Reverse Mortgage Loan (RML) or, still better, RML enabled annuities. Own real assets and avoid financial assets. Remember Lehman and Amco. The whole world is floating on debt and the debt bubble can burst again!

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