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You can invest in a debt fund which may be a fixed maturity plan (FMP), debt mutual fund, Monthly income plans (MIP), gold fund or a fund of funds (mutual fund schemes which invest in other schemes of the same or different mutual funds).
What is short term capital gain tax on a debt mutual fund?
If you sell the debt mutual fund before a year the profits/gains you get are short term capital gains and these are taxed based on the income tax slab you fall under (marginal rate). If you fall in the highest tax bracket the tax rate is 30.9%.If you want to learn more about tax please read An E-book on tax
What is long term capital gain tax on a debt mutual fund?
If you stayed invested in a debt mutual fund for over a year and sold it for a profit it was called a long term capital gain and tax was charged at 10.3% without indexation and 20.6% with indexation.
Without indexation (Long term capital gain)
If you had invested INR 20000 in units of a debt mutual fund in March 2011 and sold these units in September 2012 for INR 25000 (based on the change in its net asset value) a profit of INR 5000 is obtained .This is your capital gain.
• Tax is charged at 10.3% on this gain. You have to pay 10.3 % on the long term capital gain of INR 5000 which is INR 515.
• You have to pay a tax of INR 515 on your profits/gains of INR 5000.
With indexation: (Long term capital gain)
Indexation basically means you take the effects of inflation into consideration while calculating your capital gains.
Prices of goods such as fruits, vegetables, meat, services such as transport, houses, garments and so on increase with time. This is inflation. Inflation eats into the purchasing power of money and the same INR 100 note fetches much lesser than it would about a year or two ago.
If you had invested INR 20000 in units of a debt mutual fund in March 2011 and sold these units in September 2012 for INR 25000 a profit of INR 5000 is obtained. INR 20000 does not have the same value (purchasing power) in September 2012 as it had in March 2011 but has a much lesser value with the passage of time due to inflation. Inflation eats up into the purchasing power of money. The capital gains are much larger owing to the effects of inflation not being considered when tax is calculated without indexation. This means you have to pay a higher tax on the capital gains. Indexation saves tax on capital gains by factoring change in the purchasing power of money due to inflation.