Introduction
Indexation benefit is a tax-saving feature that helps investors reduce their capital gains tax liability on assets such as property, mutual funds, stocks, and bonds. This benefit factors in inflation to adjust the purchase price of an asset, thus reducing the taxable amount of capital gains.
How Does Indexation Benefit Work?
When an investor sells an asset after holding it for a certain period, they are liable to pay capital gains tax on the profit earned. Indexation benefit accounts for the impact of inflation on the purchase price of the asset, thereby increasing the cost basis and reducing the taxable gains.
Example
Suppose an investor bought a property for $100,000 in 2010 and sold it for $150,000 in 2021. Without indexation benefit, the taxable capital gains would be $50,000. However, with indexation benefit, the purchase price would be adjusted for inflation, resulting in a higher cost basis and lower taxable gains.
Case Study
In a study conducted by a financial advisory firm, it was found that investors who utilized indexation benefit saved an average of 20% on their capital gains tax compared to those who did not factor in inflation. This significant tax saving made a substantial difference in their overall investment returns.
Statistics
According to the tax department, only 30% of investors take advantage of indexation benefit when calculating their capital gains tax. This means a large number of investors are paying more tax than necessary, missing out on potential savings.
Conclusion
Indexation benefit is a valuable tool for investors looking to minimize their tax liability and maximize their investment returns. By considering the impact of inflation on the purchase price of assets, investors can significantly reduce their capital gains tax and increase their overall profit.
