Investment strategy for the year end

If you are worried about your tax outgo that could reduce the yield on debt investments, here’s how you can reduce the tax outgo  as well as  set off your long-term capital gains on your mutual fund debt investments.


You would have come across  fixed maturity plans offered by mutual fund throughout the year. But it is close to the financial year-end. With just a lock-in over 366 days—technically spread over two financial years–you can increase your return.


Here’s how. There’s a thing called double indexation. This helps you score as inflation rises.


The income tax department allows you to bring the cost of certain assets/investments to the present value, based on inflation, while calculating your gains from the sale of such investments. As part of this, all debt mutual funds held for more than one year enjoy indexation benefits.



To highlight the advantages of this option,  let’s go through the workings of the indexation method. The long-term capital gains earned from non-equity mutual funds are taxed at 10.3% if you stay invested beyond one year if you don’t use the indexation benefit. But if you opt for this route, your gains are taxed at 20.6%. Despite the higher rate, the indexation facility is beneficial, especially with the high inflation levels.

Here’s how it works. Every financial year, the Income Tax Department declares the cost inflation index (CII). For 2013-14, it is 939 while for 2012-13, it was 852. So, the indexation benefit over the two years works out to 10.21%.


For instance, you invested Rs 10 lakh in a Fixed Maturity Plan in last week of March 2012 and sold the same  on the first of April 2013 and earned 9.5 return. Your investment would have grown to Rs 10,95,000.


But your investment after double indexation is Rs 11,02,000.Due to inflation your money have not grown but it has depreciated by Rs 7,000.So, it means you need not pay tax for the income earned.


In net you have capital loss of Rs 7000 and the same can be set off against any long-term capital gain.


So, investing in debt fund with tentative period will help you to earn tax-free return in an inflationary period when compared to fixed deposits.


If you had invested the same money in FDs and you are in the 30 per cent tax bracket, of the Rs 95,000 earned as interest, you need to pay a tax of Rs 28,500. The effective earning will be Rs 66,000. In terms of return in per cent it will be 6.6 per cent.


To benefit from technique, check with us  to calculate the indexation before file your returns.


So, enjoy investing in debt schemes and earn a better yield.



For any clarification, write to me at or


Next newsletter: How to set off your capital gains for the financial year.



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