Was rushing through an old magazine and was stuck with an article on double taxation. Out of curiosity searched a bit more and found this interesting enough to share.
What is this about?
It is a way to save tax in two fiscals on same investment. Through Double Taxation, one can save tax on gains that one makes on mutual fund investments as well as on Fixed Maturity Plans (FMP). Benefit is applicable on all DEBT Instruments since Long-term CAPITAL GAINS TAX is applicable on Debt Instruments if sold after a year.
Secret is that in order to account for inflation, Govt allows you to inflate cost price of product once every year if you hold on to investment for more than a year. Be careful with pros and cons 'coz though normally long term capital gain tax is 10.33% but if you adjust for cost inflation you may end up paying 20.6% capital gain tax
Example
Say you invest 1 lakh in a 14 months fixed maturity plan in Feb 2013 with maturity due in April 2014. In this case though tenor is 14 months but investment is across 2 fiscal years hence we can inflate cost price twice.
Let us assume that as per Govt. inflation index inflation for year is 8% then cost of 1 lakh investment considering 8% YOY inflation will be Rs 1.17 lakh this cost inflation of Rs 17000.
Assuming interest rate of 9% pa. on FMP instrument, total interest earned over 14 months on FMP will be Rs 10635. Since interest earned is less than inflation in cost hence tax is not deductible on this instrument.
Ques: Can I selectively inflate cost for instruments or should it be same across the reported investments?
