In the middle of such a situation, there is one benefit available for mutual fund investors whereby they can get the gains of two years even while they are investing only for a single year.

This is possible because investors can get the benefit of a term called double indexation.

The end of the financial year is the most suitable time when this can be utilised. Here is a close look at the entire issue and how the benefit can be obtained.

Indexation: When an investor holds an asset such as an equity share or a mutual fund for 12 months or more, it is classified as a long-term asset.

For assets where long term capital gains tax is not zero, indexation benefit is available.

For equity investments like shares and equity-oriented mutual fu-nds, there is zero rate of tax when the investments are held for more than 12 months.

So the question of taking the benefit of indexation does not arise. However this is necessary in case of a debt investment and there is a specific procedure that is followed.

Instead of just looking at the sale price of the investment and then comparing it with the cost price, a different way is adopted to calculate capital gains or loss on the transaction.

In order to give the benefit of inflation effect to the investor, the cost of the investment is raised by a figure, which is announced in the form of an index figure each year.

This index figure is known as the cost inflation index (CII) and it is announced each year by the tax authorities.

Manner of calculation: To calculate indexation, index numbers of the financial year of the sale of the asset and the year of the purchase of the asset are considered for the purpose of increasing the cost. The year here refers to a financial year, so it covers a period from April to March.

For example, if an asset is bought for Rs 40,000 in 2006-07 and sold in 2009-10, then for the purpose of calculating capital gains, the cost of the asset will be 40,000 X 632 (CII of the year of sale)/519 (CII of the year of purchase) = 48,709.

In this case, if the asset is sold for Rs 50,000 then the gain is not Rs 10,000, but Rs 1,291.

Double benefit: In February and March, there is a double benefit that an individual can take with respect to their debt mutual fund investments.

These funds will have the benefit of indexation when the holding is for more than 12 months.

The idea is to look for investments for 13-14 months. Funds also provide a lot of options in the form of fixed maturity plans that are launched in February-March and mature in April-May of the next year.

This represents the benefit for the entire investment.

When it comes to the purpose of calculation of the gains, there is actually a double-year benefit in the form of indexation that is available to investors.

This happens because the purchase is in the financial year 2010-11 while the sale will be in the financial year 201213 because it is after April of the next year.

This will lead to a position where it is likely that the entire amount of earnings of the individual will become tax-free because the indexation gain will most probably be more than the returns generated during this period. Even when the returns are high and there is a small rise in the index number, the gains are also very marginal, which ultimately bring down the tax impact for the individual.

In case there is a loss, it will become a good way to ensure that the income earned remains tax free in nature plus some other income can be set off against the loss from this investment.

Happy Investing!!

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