Obviously indexation is not applicable for STCG but only for LTCG. That means if you sell your debt fund after 3 years then you can get the benefit of indexation. The indexation is a protection given by the income tax department against inflation. Each year, the IT department announces the index value. The table below captures the gist of index values for last 18 financial years. For any purchases made before 2001, the index of 100 will only be considered. Check out the index values below.

Index Values announced by Income Tax Department (Base is 2001-12)

FY 2001-02

FY 2002-03

FY 2003-04

FY 2004-05

FY 2005-06

FY 2006-07

100

105

109

113

117

122

FY 2007-08

FY 2008-09

FY 2009-10

FY 2010-11

FY 2011-12

FY 2012-13

129

137

148

167

184

200

FY 2013-14

FY 2014-15

FY 2015-16

FY 2016-17

FY 2017-18

FY 2018-19

220

240

254

264

272

280

Using the index table is quite simple. If you bought a debt fund in FY 2013-14 at Rs.100 and sold in FY 2017-18 at Rs.160 then your indexed cost of acquisition will be Rs.123.66 (100 x (272/220). Thus you will have to pay the 20% LTCG tax on the debt fund on the indexed capital gains which is Rs.36.34 (160-123.66). Thus indexation helps you reduce your tax outflow by giving you the benefit of cost inflation indexation (CII).

There is also an aspect of double indexation that works here based on the timing of entry. Typically, closed ended funds like fixed maturity plans (FMP) use the dual indexation benefit quite widely. Here is how it works. If you bought a debt fund on March 27^{th} 2015 and sold the fund at a profit as above on April 2^{nd} 2018, then your relevant index numbers will be 240 and 280 because although the holding period is just 5 days more than 3 years, you are actually straddling 4 different fiscal years. This gives you the added benefit of one additional year of indexation free of cost and that further reduces your capital gains tax. This is the principle on which FMPs with tenure of 3 years and 10 days or 12 days operate.

manisha Kolvenkaranswered.Obviously indexation is not applicable for STCG but only for LTCG. That means if you sell your debt fund after 3 years then you can get the benefit of indexation. The indexation is a protection given by the income tax department against inflation. Each year, the IT department announces the index value. The table below captures the gist of index values for last 18 financial years. For any purchases made before 2001, the index of 100 will only be considered. Check out the index values below.

Index Values announced by Income Tax Department (Base is 2001-12)FY 2001-02FY 2002-03FY 2003-04FY 2004-05FY 2005-06FY 2006-07100

105

109

113

117

122

FY 2007-08FY 2008-09FY 2009-10FY 2010-11FY 2011-12FY 2012-13129

137

148

167

184

200

FY 2013-14FY 2014-15FY 2015-16FY 2016-17FY 2017-18FY 2018-19220

240

254

264

272

280

Using the index table is quite simple. If you bought a debt fund in FY 2013-14 at Rs.100 and sold in FY 2017-18 at Rs.160 then your indexed cost of acquisition will be Rs.123.66 (100 x (272/220). Thus you will have to pay the 20% LTCG tax on the debt fund on the indexed capital gains which is Rs.36.34 (160-123.66). Thus indexation helps you reduce your tax outflow by giving you the benefit of cost inflation indexation (CII).

There is also an aspect of double indexation that works here based on the timing of entry. Typically, closed ended funds like fixed maturity plans (FMP) use the dual indexation benefit quite widely. Here is how it works. If you bought a debt fund on March 27

^{th}2015 and sold the fund at a profit as above on April 2^{nd}2018, then your relevant index numbers will be 240 and 280 because although the holding period is just 5 days more than 3 years, you are actually straddling 4 different fiscal years. This gives you the added benefit of one additional year of indexation free of cost and that further reduces your capital gains tax. This is the principle on which FMPs with tenure of 3 years and 10 days or 12 days operate.