July 2014

Latest Cost of Inflation Index March 2014 & Double indexation benefits.

Latest Cost of Inflation Index March 2014 , Double indexation benefits, Short term debt, 30% tax bracket, Investing strategies, year end tax planning

Cost of Inflation Index upto FY 2013-14. (The year mentioned is financial year(FY) 

The cost of inflation index is useful for income-tax assesses in the computation of tax on long-term capital gains (for indexation purposes). In the previous two years, the cost inflation index rose 10 per cent and 12.5 per cent, respectively.

A cost inflation index helps reduce the inflationary gains, thereby reducing the long-term capital gains tax payout for the taxpayer. Currently, the income-tax law allows long-term capital gains to be computed after adjusting for inflation (Debt Mutual Funds, FMP’s, Real Estate Gains etc.) .

The cost of acquisition as well as the cost of improvement is adjusted for inflation between the date of purchase and date of sale (through the cost inflation index) before the long-term capital gain is ascertained.

Assume, if the investor invested Rs 1,00,000 in the growth option on March 30, 2012 and redeemed the investment on April 2, 2013 for Rs 1,10,000 

The investment happened in financial year 2011-12, for which the government has declared cost inflation index of 785.

The investor redeemed the investment in financial year in 2013-14, for which the cost inflation index is 939.

The capital gains is Rs. 110,000 minus Rs. 100,000 i.e. Rs. 10,000.

The holding period is 367 days, which is more than 1 year. Therefore, it is a long term capital gain.

The maximum tax the investor has to bear is 10% (plus surcharge plus education cess) on the capital gain of Rs. 10,000. Thus, the maximum tax payable would be Rs. 1,000 (plus surcharge plus education cess).

Investor can benefit from indexation. The indexed cost of acquisition is Rs. 100,000 X 939 ÷ 785 i.e. Rs. 119,618 . This is higher than the selling price of Rs. 110,000. Thus, the investor ends up with a long term capital loss of Rs. 9,618. So no tax payable and also this can be set off against long term capital gains, as discussed in the next section.

Another point to note is that although the investor held the investment for slightly more than a year, the investor gets the benefit of indexation for two years viz. 2011-12 and 2012-13. Hence the name “double indexation” for such structures.

Mutual funds tend to come out with fixed maturity plans (FMP’s) towards the end of every financial year to help them benefit from such double indexation. Even short term debt is a good investment towards the financial year end, as they too offer the same benefits. 

Largely investors are unaware about this benefit. This benefit can and should be taken by investors who are in 30% tax bracket as they get the maximum benefit. So, invest in wither FMP’s or Short term Debt (Holding period > 1 yr) towards the end of a financial year, and sell towards the beginning of a financial year and take advantage of   double indexation tax benefit for virtually tax free capital gains. Money saved is indeed Money earned.

Be Money Savvy and invest smart. Happy Investing. 

December 2013

Investors can take advantage of Investing in Double Indexation FMP’s

Double INdexation Tax benefits, Fixed Maturity Plans, FMP's, Inflation adjusted Bonds

Fixed Maturity Plans are closed ended funds and are available as NFO’s. They are open for very short periods of time (generally 4 – 5 days). FMP’s are ideal tax saving vehicles and suited for investors in the highest tax brackets, who are conservative, looking to park lump sum funds for about 1-2 years, in return for a Fixed Income similar to FD’s.  There is no TDS deduction in FMP’s , which is an obvious drawback in FD’s as the TDS deducted in FD’s does not earn any interest. Thus Longer duration FD’s suffer in terms of returns.

Please note that the drawback of investing in FMP’s is illiquidity, hence only surplus funds should be parked which will not be required to meet any financial goals during the said timeframe.

Double Indexation FMP’s are round the corner which offer tremendous tax advantage vis-a-vis FD’s . Smart Investors take advantage of investing in FMP’s which offer the safety of capital similar to FD’s and also the tax advantages.

What is double indexation and how does it work? Here is a simple example.

Investors can claim double indexation benefit if the holding period is over three financial years. Consider the case of a 500-day FMP, which starts on 20 Dec 2013 and matures on 04 May 2015. Since it is spread over three financial years-2013-14 (investing year), 2014-15 (holding year) and 2015-16 (redemption year)-the indexation will be for two years . In this case, in all probability, one can report a long-term capital loss (instead of gain) and it can be set off against other long-term capital gains reducing the tax liability further.

Leading Asset Management Companies (AMC’s)  like HDFC , ICICI , Birla Sun Life, Kotak, Reliance etc. typically come up with Double indexation FMP’s starting December of every year through March. You can find the open NFO’s at the AMFI Website : NFO’s

Investors having surplus funds which can be locked away for 1.5 yrs should plan on investing in FMP’s

The advantage of investing in FMP’s over FD’s in terms of returns is a no brainer. Current 1 year FD returns are at around 9% and so the post tax returns (for the highest tax bracket) is pathetically around 6%

Here is an ET article dated Dec 20 2013 which talks about the benefits of investing in FMPs : Long term FMP a good bet

The tax advantages of investing in FMP’s is mentioned in detail here (What-are-fixed-maturity-plans-fmps-advantages-disadvantages) and I will not elaborate on that further.

Happy Investing and tax savings this season.

February 2013

Time to take double indexation benefit ~ From Now until March 2013

 

Double Indexation Benefit, Save Taxes, Invest in FMP's, Fixed Maturity Plans NFO'sIt is that time of the year when you have a window of opportunity to intelligently invest for just over 1 year and get tax free returns.

The opportunity arises every year from mid-feb until financial year ending i.e March 31

You need to invest in Fixed Maturity Plans (FMP’s) of more than 14 months and which matures in April 2014. By doing this, your investment in a debt product spans over three financial years. And thus enables you to take advantage of double indexation on long term capital gains (which is taxed @20.6% post indexation) .

With inflation running at almost 8 %, the returns virtually becomes tax free. And is ideal for investors in highest tax brackets (30%). (Cost Inflation Index Table)

Fixed Maturity Plans are closed ended funds and are available as NFO’s. They are open for very short periods of time (generally 4 – 5 days). These funds are available from leading Asset Management Companies (AMC’s)  like HDFC , ICICI , Birla Sun Life, Kotak, Reliance etc. You can find the open NFO’s at the AMFI Website : NFO’s

The estimated current yields on these FMP’s should be in the range of 9.5 %.

FMP’s are ideal tax saving vehicles and suited for investors in the highest tax brackets, who are conservative, looking to park lump sum funds for about 1-2 years, in return for a Fixed Income similar to FD’s.  Please note that the drawback of investing in FMP’s is illiquidity.

The advantage of investing over FD’s in terms of returns is a no brainer. Current 1 year FD returns are at around 8.5% and so the post tax returns (for the highest tax bracket) is pathetically around 5.8%

The tax advantages of investing in FMP’s is mentioned in detail here (What-are-fixed-maturity-plans-fmps-advantages-disadvantages) and I will not elaborate on that further.

Happy Investing and tax savings this season.