# What is Indexed cost

What is Indexed cost?

Sep 16, 2016 by Asis Maiti,   |   Mutual Fund

For certain asset classes like debt fund, gold (paper or physical), real estate etc, tax rules allow for indexation benefit for long term capital gains. Long term capital gains period for these asset classes are 36 months or more. In long term capital gains with indexation benefits, the investor is allowed to index the cost of purchase by multiplying the purchase price with the ratio of cost of inflation index at the time of sale and cost of inflation index of purchase. Cost of inflation index data is published by the Income Tax Department. Long term capital gains tax is 20% after indexation.

Let us understand this with the help of an example.

Suppose you purchased 100 units of a debt fund at NAV of Rs 100. Your total purchase consideration is Rs 10,000 (100 X 100). You sold 100 units of the debt fund after 37 months at NAV of Rs 130. Your total sales consideration is 13,000 (130 X 100) Since, you held the units of the debt for more than 3 years, long term capital gains tax applies. Suppose the Cost of Inflation in the year of purchase was 939 and year of sale was 1125. The indexed purchase price will be = Purchase NAV X (Cost of inflation index in the year of sale / Cost of inflation index in the year of purchase) = 100 X (1125/939) = 119.8

Your total purchase value after indexation = 100 X 119.8 = 11,980

Your sales value = 13,000

Your capital gains = 13,000 – 11,980 = 1,020

Long term capital gains is taxed at 20% after indexation.

Your long term capital gains tax = 20% X 1,020 = 204

Hope this clarifies. Thanks

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