InvestorQ : What is the logic of giving indexation benefit for calculating LTCG on non-equity assets?
Arti Chavan made post

What is the logic of giving indexation benefit for calculating LTCG on non-equity assets?

Answer
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1 year ago


When calculating capital gains in case of non-equity oriented mutual funds, property, gold, and others where you are taxed on LTCG, you get the indexation benefit to determine your net capital gain. It is by now quite clear and we would all agree that inflation eats into most of what is earned as profits by investing into capital assets such as the ones mentioned above. Let us first spend a moment understanding what inflation is all about?

For someone wondering what that inflation is, here is a simple example to help you understand the same –

All else equal, if a box of sweets priced at Rs.100 last year, chances are the same could cost Rs.110 this year. The price differential is attributable to Inflation, which in this example is 10%. Inflation is the % by which purchasing value of your money diminishes. The rise in price could be due to various reasons but the main factor in is that the cost of living has gone up.

Assuming the average inflation rate in India of around 6.5%, if you had invested into a debt fund, wouldn’t a big portion of your long term capital gain at the end of 3 years get eaten away by inflation?

For example assume you had invested Rs.100,000/- into a debt fund, and you got back Rs 130,000/- at the end of 3 years. You have a long term capital gain of Rs.30,000/-. But in the same period assume purchasing value of money is dropped by 18,000 because of inflation. Should you still pay long term capital gain on the entire 30,000? Logically, the answer is no and that clearly does not make sense.