Long Term Capital Gains Tax And Indexation
LTCG & Indexation
Indexation benefit is not applicable to all long-term capital gains and you must know the nuances in order to file your taxes accurately. Here’s a primer.
What Are Capital Gains?
Capital gains arise when you sell an investment at a price higher than its original cost.
While gains are the objective of investing, in certain types of investments, returns come only in the form of interest income or dividend income.
What Is Indexation?
In some cases, the tax liability arising from capital gains is adjusted lower thanks to indexation.
However, this indexation benefit is not applicable to all long-term capital gains.
Indexation benefit is applicable only where the capital gains are long term in nature.
What is long term? This is defined distinctly, depending on which asset is under consideration.
Indexation- How It’s Applied
Exchange-Listed Equity Assets
“Long-term” for exchange-listed equity assets, including equity funds, qualifies if you have remained invested for over 12 months.
For listed debt securities like bonds, long-term refers to a holding period beyond 12 months.
For unlisted debt securities, including debt funds, “long-term” is applicable after you have been invested for at least 36 months.
The Purpose Of Indexation
The idea behind indexation is to make a fair assessment of gains on the real value of the property/financial asset rather than taxing gains based on the nominal face value.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.