Anil: Thanks for the information on indexation on taxable income.
What a brilliant idea. I am not good with numbers.
But even I can see the inventiveness and creativity
in this instrument of taxation. The rich get richer.
JPR
Yes. We may take the following example:
Original Cost of 1,000 Units (Purchased on 7.9.1981, index 100)
Rs. 10,000
Sale Proceeds (Sold on 28.2.1998, index 331)(1,000 units)
Rs.25,000
Capital Gain (without considering indexation - Long Term)
Rs. 15,000
But, because of indexation, capital gain will be worked out as under:
Cost (1981, index 100) of 1,000 units [Rs. 10,000 x 331 /100 ]
Rs. 33,100
Sale Price of 1,000 units
Rs. 25,000
Capital Loss (Long Term)
Rs. 8,100
Investor Wow! You have converted my capital gain of Rs. 15,000
into a capital loss of Rs.8,100? Is that real?
Advisor Yes. This is for income tax purposes. You will notice
that against a generally understood surplus (capital gain)
of Rs. 15,000 (25,000 sale price - 10,000 cost) the effective "capital gain" for the purposes of Income tax Law is "loss" of Rs. 8,100 (Indexed Cost 33,100 - Sale Price 25,000). Thus, the
investor, on his "Surplus" paysno income tax at all entirely
because of the concept of indexation in computing the cost of the capital asset called Units of a Mutual Fund.
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