Before we discuss the latest developments regarding indexation, let us first examine its definition and the advantages it offers for long-term investors who invest in fixed-income investors.
Indexation is an intelligent technique to minimize the taxes you must pay on your investment returns. It is most suitable for long-term investments, such as debt funds and other types of assets. With indexation, you can adjust the purchase price of your investments to account for inflation, which is crucial for accurately calculating your profits or losses. Doing so can lower your tax burden and potentially increase your gains. In essence, indexation can help you retain more of your investment returns by accounting for the effects of inflation.
Indexation allows you to reduce your taxable income by minimizing long-term capital gains. This is why debt funds are often regarded as a superior fixed-income investment choice compared to traditional fixed deposits (FDs). Indexation can make investing a mutually beneficial activity, leading to greater returns.
Let us take a discerning plunge into the news!Â
The revised Finance Bill states that mutual funds with less than 35 percent equity exposure (essentially comprising debt, gold, and international funds) will no longer benefit from indexation. This means all profits will be included in your annual income and taxed according to your tax bracket. ITR filing platforms make it easier for you to find out your tax bracket.
The new regulation is disappointing for those who invest in fixed-income instruments. However, it is crucial to carefully understand the implications of the revision, not act upon it impetuously, and lay out the following action plan. The changes may be unsettling, but they might not be as bad as we think!
After April 1, 2023, debt funds purchased will be subject to the new tax regulations per the finance bill. Existing investments will not be affected.
In the meantime, if you intend to invest in fixed-income funds, you should do so before March 31, 2023, to avail the current tax benefits. After April 1, 2023, debt funds purchased will be subject to the new tax regulations per the finance bill.
Although the tax benefits of investing in debt funds have been eliminated, several advantages are still worth considering.
Let us talk about a few benefits that can still get gained from debt funds:
Taxation only occurs at the time of withdrawal, not accrual. This means you can postpone (e-filing or offline) taxation until the future when you withdraw, unlike a fixed deposit (FD). Debt funds offer liquidity, allowing you to withdraw without penalty (after the initial 1-3 months) and without incurring any penalty as you do with fixed deposits. Debt funds still get identified as capital gains. Capital gains can be set off against losses. You can adjust the capital gains you incur now or later with any capital losses you may have. You can carry forward losses for up to eight years in your Income Tax Return (ITR).
In addition, it is worth noting that you don’t need to be concerned about filing taxes since various online platforms make itr e-filing a hassle-free and beneficial process.
