How To Use Double Indexation To Reduce Your Taxes?

Nutan Gupta

27 Jun 2017

New Page 1

Transaction of capital is great as long as the flow is incoming. The common enemy that the common man shares is 'Tax'. One avoids the straight path and follows the curviest road possible, all to save taxes off their hard earned money. Interestingly, there are other shorter and smarter ways of reducing taxes on your capital. Double Indexation is one such method employed to sail through sea of taxation in India.

Understanding the Basics

The term Indexation is nothing but a method for suitable balancing of payable tax by stationing an appropriate price index, which is to be adjusted according to the inflation rate. It basically balances the value of one's asset by taking into consideration the inflation rate from the time of purchase to the time of selling. For instance, a man buys a property for Rs 10 lac in the year 2010 and he sells it off in 2015 for Rs 25 lac. Dividing the CII (Cost Inflation Index) for the year 2010-11 and 2014-2015, we get a value 1.4402. This number multiplied by the purchase price will give us about Rs 15.2039 lac, which is the indexed purchase price. Accordingly, this capital gain (profit) would Rs 25 lac-Rs 14.402 lac, which is around Rs 10.597 lac and not, as earlier assumed, Rs 25 lac-Rs 10 lac = Rs 15 lac. The man now has to pay tax on Rs 10.597 lac and not Rs 15 lac.

Twisting the Plot

Indexation hence works out in the favor of a taxpayer. A smarter way around is double indexation over the trading of your assets. It is shown that index value changes every year, in accordance with the fluctuating inflation rate. Double Indexation is nothing but buying an asset just before the financial year end (the month of March) and selling it off right after it. Let us consider the man from the previous example. This man invests in the same property in the year 2010 but in the month of February and he sells it off in May 2015. Here, he will be entitled to CII from 2009-10 to 2015-16. As a result, his new CII divided value would be 1.7104. By doing similar calculations, his tax payable amount has now reduced to Rs 7.896 lac. Despite having held the property for a little over 5 years, this man has enjoyed indexation benefits for two extra years.

Summing It Up

Since returns from equities become tax-free for a 12 month holding period, the concept of double indexation isn't applicable to it. It, though, can suitably be applied to different assets such as FMPs (Fixed Maturity Plans), Gold Funds, International funds etc. Benefits by double indexation are best tapped during the month of February and March. The difference in the tax payable amount, as shown in the previous example, is significant. With appropriate planning, long-term gains can be achieved in a further profitable way.


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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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How To Use Double Indexation To Reduce Your Taxes?

Nutan Gupta

27 Jun 2017

New Page 1

Transaction of capital is great as long as the flow is incoming. The common enemy that the common man shares is 'Tax'. One avoids the straight path and follows the curviest road possible, all to save taxes off their hard earned money. Interestingly, there are other shorter and smarter ways of reducing taxes on your capital. Double Indexation is one such method employed to sail through sea of taxation in India.

Understanding the Basics

The term Indexation is nothing but a method for suitable balancing of payable tax by stationing an appropriate price index, which is to be adjusted according to the inflation rate. It basically balances the value of one's asset by taking into consideration the inflation rate from the time of purchase to the time of selling. For instance, a man buys a property for Rs 10 lac in the year 2010 and he sells it off in 2015 for Rs 25 lac. Dividing the CII (Cost Inflation Index) for the year 2010-11 and 2014-2015, we get a value 1.4402. This number multiplied by the purchase price will give us about Rs 15.2039 lac, which is the indexed purchase price. Accordingly, this capital gain (profit) would Rs 25 lac-Rs 14.402 lac, which is around Rs 10.597 lac and not, as earlier assumed, Rs 25 lac-Rs 10 lac = Rs 15 lac. The man now has to pay tax on Rs 10.597 lac and not Rs 15 lac.

Twisting the Plot

Indexation hence works out in the favor of a taxpayer. A smarter way around is double indexation over the trading of your assets. It is shown that index value changes every year, in accordance with the fluctuating inflation rate. Double Indexation is nothing but buying an asset just before the financial year end (the month of March) and selling it off right after it. Let us consider the man from the previous example. This man invests in the same property in the year 2010 but in the month of February and he sells it off in May 2015. Here, he will be entitled to CII from 2009-10 to 2015-16. As a result, his new CII divided value would be 1.7104. By doing similar calculations, his tax payable amount has now reduced to Rs 7.896 lac. Despite having held the property for a little over 5 years, this man has enjoyed indexation benefits for two extra years.

Summing It Up

Since returns from equities become tax-free for a 12 month holding period, the concept of double indexation isn't applicable to it. It, though, can suitably be applied to different assets such as FMPs (Fixed Maturity Plans), Gold Funds, International funds etc. Benefits by double indexation are best tapped during the month of February and March. The difference in the tax payable amount, as shown in the previous example, is significant. With appropriate planning, long-term gains can be achieved in a further profitable way.