FREE Account Opening + No Clearing Fees
Loading...

Is indexation applicable on mutual funds for NRI?

Zerodha (Flat Rs 20 Per Trade)

Invest brokerage-free Equity Delivery and Direct Mutual Funds (truly no brokerage). Pay flat Rs 20 per trade for Intra-day and F&O. Open Instant Account and start trading today.

Yes, NRIs can benefit from indexation on certain funds.

If investments are made in listed Money market/Liquid schemes/ debt funds, then 20% tax is levied on the gains after indexation. This means that NRIs can apply indexation and adjust their price of acquisition of the units and then pay taxes.

Indexation is a technique to adjust the purchase price of a fund to factor in the effect of inflation on it. A higher purchase price means a lesser profit, resulting in a lesser tax.

Say you bought 100 units of a debt fund at a NAV of Rs 10. After 3 years, you sell the units at Rs 15. 

Your gains= (Rs 15-Rs 10)X 100= Rs 500.

Taxes without indexation= Rs 500 X 20.60% = Rs 103.

To calculate taxes, when indexation is applied, we need to first calculate the indexed cost of purchase using the following formula:

ICoP = Original cost of purchase * (Cost Inflation Index of the year of sale/Cost Inflation Index of the year of purchase)

Cost Inflation Index data is released by the Government of India every year.

Say CII is 1500 on the year of purchase and will be 1700 on the year of sale.

So, ICoP= 10 X 1700/1500=11.33

Your gains= (Rs 15-Rs 11.33)X 100= Rs 367.

Taxes with indexation= Rs 367 X 20.60%= Rs 75.60.

Indexation enables you to pay lesser tax on your mutual fund gains.



Comments

Add a public comment...