Here is where the other than equity-oriented funds helps to minimise tax. You saw how at the end of five years; we have assumed the value of your investment to be Rs 15,000. So, the capital gain here should be Rs 5000, right? Wrong. In this case, the
capital gain is taxable at 20% after indexation (For resident Investors). Via indexation, you calculate the new value of your investment, considering inflation, and hence, the capital gains become lesser. The cost of inflation
index (CII) is the factor used to determine this value which is declared for every financial year.
Let us see how-
Indexed value= (CII of the sale year/CII of the
purchase year) * original investment value
Your indexed value
will be (301/254) *10,000= Rs 11,850.39
Now, your capital gain = Rs 15,000- Rs
11,850.39= Rs 3149.6
And the LTCG Tax @20% = Rs 629.92
Without the indexation benefit and at the same tax rate of 20% LTCG, you’d have paid a tax of Rs 1000 (20% of Rs 5000). It is a small difference here in the above mentioned example, but when your investment and redemption
run in lakhs, the tax amount can be huge.
Thus, the other than equity-oriented mutual fund returns over long-term are made both, tax-efficient and inflation-sensitive by introducing indexation benefit.
Please note that the above calculations are done exclusive of the cess chargeable in addition to the capital gains tax.