Definition
Indexation (Debt - Pre-2023)
Indexation was a tax benefit that adjusted a debt investment's purchase cost for inflation, lowering taxable long-term capital gains; it was largely removed for debt funds from April 2023.
Until March 2023, debt funds held over three years enjoyed long-term capital gains taxed at 20% with indexation, which inflated the cost base and sharply reduced the taxable gain. This made debt funds far more tax-efficient than fixed deposits.
From 1 April 2023, gains on most debt funds are taxed at the investor's slab rate regardless of holding period, ending this advantage. Understanding the change matters because older investments and certain fund types may follow different rules.
Related terms
- Capital Gains on Mutual FundsCapital gains tax on mutual funds depends on whether the fund is equity or non-equity and how long you held the units before selling.
- Fixed Maturity Plan (FMP)A fixed maturity plan is a closed-end debt fund with a defined tenure that buys bonds maturing around the same time, aiming to deliver a predictable return.
- Real ReturnReal return is what your investment earns after subtracting inflation, showing the actual gain in purchasing power rather than the headline rupee figure.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.