fixed maturity plans double indexation benefit
fixed maturity plans double indexation benefit can be availed by investors if they hold their debt mutual fund investments spreading two financial years. The fixed maturity plans double indexation benefit is applicable only if investments are held for more than one year and eligible for Long Term Capital Gains (LTCG tax). Investments held for less than a year are neither eligible for LTCG nor indexation benefit.
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What is indexation?
Let us take an example. If investor A buys a fund in year 2010 for 1 Lack and sells the same in year 2012 for 2 lacks. He need to pay tax on profit of 1 lack. But it will be unfair because what 1 lack would have purchased in year 2010 costs more in 2013 due to inflation effect. Indexation helps to offset the effect of inflation on investments. Inflation index is published every year and is calculated taking into consideration the effect of inflation. The present indexation is calculated using the base year as financial year 1981-82 (Base Value is 100).
In the above example purchase price will be 1,00,000 * 852 /711 = 119831. So profit is calculated as 200000-119831=80169 but not 100000 (Here is the list of inflation index from 1981 to 2012)
As you understand the concept and benefit of indexation, let us see what is double indexation. Double indexation is a benefit which can be available by debt mutual fund investors by spreading their investments in two financial years. Now it is evident why most funds queue to launch their FMP in feb/mar. Just by issuing FMP with tenure just more than 365, investments can be spread over two financial years thus giving double indexation benefit to investors.
Apart from availing fixed maturity plans double indexation benefit, you can benefit by high interest regime by investing now. There are many indications that interest rates are peaked and RBI has already cut interest rates once and gave indications for further rate cuts. By investing in FMP’s now, you can lock your savings at higher interest rates. Till the time government introduces inflation indexed bonds, consider Fixed Maturity Plans for better post tax returns.
As seen debt funds (Fixed Maturity Plans) are suitable for investments while the inflation is high and / or interest rates are high. Indications are high that inflation will be moderated to 6-7%. Interest rates are also in down spiral since first rate cut by RBI in Jan 2013 after long time. This might be one of the best times to invest your money to have tax benefit by availing double indexation benefit. Icing on the cake will be the locking of high interest rates.
fixed maturity plans double indexation benefit – concern of liquidity
Indexation benefit is available for asset classes like real estate too. Here the focus was for fixed maturity plans double indexation benefit only. One caution before you choose FMP only for taxation benefit. Fixed Maturity Plans are closed ended funds and are listed on stock exchanges for trading. Liquidity in these FMP’s on stock exchanges are extremely low and almost always less than fair value. You may need to exit them below fair price if redemption of your investments are required.