Do bonds have indexation benefits?
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Yes, bonds have indexation benefits in India. Indexation is a method of adjusting the purchase price of an asset to account for inflation. This means that if you buy a bond and the price of inflation rises during the time you hold the bond, the government will adjust the purchase price of the bond tRead more
Yes, bonds have indexation benefits in India. Indexation is a method of adjusting the purchase price of an asset to account for inflation. This means that if you buy a bond and the price of inflation rises during the time you hold the bond, the government will adjust the purchase price of the bond to reflect the increase in inflation. This can help to reduce the amount of capital gains tax you have to pay when you sell the bond.
In India, indexation benefits are available for bonds that are held for more than three years. The indexation factor is calculated by the government using the Wholesale Price Index (WPI). The WPI is a measure of the prices of goods and services traded in wholesale markets. The higher the WPI, the more inflation has occurred.
To calculate the indexation benefit, you multiply the purchase price of the bond by the indexation factor. The result is the adjusted purchase price of the bond. You then subtract the adjusted purchase price from the selling price of the bond to calculate your capital gains. The capital gains are then taxed at the applicable rate.
For example, let’s say you buy a bond for Rs.100 in 2023. The WPI in 2023 is 100. You sell the bond in 2026, when the WPI is 120. The indexation factor for the three years is 1.2. The adjusted purchase price of the bond is Rs.120. Your capital gains are Rs.20. You will pay tax on Rs.20 at the applicable rate.
Indexation benefits can be a significant tax saving for investors who hold bonds for a long period of time. However, it is important to note that indexation benefits are not available for all types of bonds. For example, indexation benefits are not available for bonds that are issued by foreign governments or corporate bonds that are not rated AAA.
If you are considering investing in bonds, it is important to consult with a financial advisor to determine if indexation benefits are available for the type of bonds you are interested in.
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