18 February 2013
I have invested in 'HDFC Monthly Income Plan-LTP-Dividend Month' & 'Reliance Monthly Income Plan'. The question is whether the indexation will be allowed or not at time of sale as they are debt funds??
(As per 3rd proviso to Section 48 debentures & bonds are not allowed for indexation but as per proviso to Section 112 we can index listed securities & the definition of securities include shares , stocks, bonds,debentures, debenture stock,etc) Another point is the above told plan are debt funds but not classifying whether they are bonds or debentures or not ??
Can u provide me the full explanation of thinking that indexation should be given because if the Income Tax Department ask the reason then what will be my reply i.e. as per which section i should appeal that indexation will be allowed ??
03 August 2025
Sure! Here’s a detailed explanation regarding indexation on debt mutual funds like 'HDFC Monthly Income Plan-LTP-Dividend Month' and 'Reliance Monthly Income Plan':
1. What is indexation? Indexation allows you to adjust the purchase price of an asset for inflation by applying the Cost Inflation Index (CII). This reduces your capital gains and tax liability.
2. Section 48 and the 3rd proviso: The 3rd proviso to Section 48 states that indexation benefit is not allowed on bonds and debentures, unless they are listed securities.
3. Section 112 and definition of securities: Section 112 covers Long Term Capital Gains on listed securities (including shares, stocks, bonds, debentures, debenture stock, etc.).
If securities are listed, indexation is allowed on the capital gains arising from their transfer.
4. Are units of debt mutual funds considered securities? Mutual fund units are classified as securities under Section 2(h) of the Securities Contracts (Regulation) Act, 1956.
Therefore, units of mutual funds (including debt funds) are treated as securities.
5. Indexation on debt mutual funds: Debt mutual funds are treated as securities.
Therefore, long-term capital gains (LTCG) on debt mutual funds are eligible for indexation benefit, provided the units are held for more than 36 months.
6. Provisions applicable: The income from transfer of units of debt mutual funds held for more than 36 months is classified as LTCG.
As per current tax laws, LTCG on debt mutual funds is taxed at 20% with indexation benefit.
Summary for your case: The plans you mentioned are debt mutual funds.
Units of debt mutual funds are considered securities.
Hence, indexation benefit is allowed on long-term capital gains arising from sale of these units.
Refer to Section 48 (capital gains computation) and Section 112 (tax on LTCG of securities) for legal backing.
The 3rd proviso to Section 48 does not apply to mutual fund units since they are securities, not bonds or debentures in the strict sense.
Suggested reply if Income Tax Department asks for explanation: "As per Section 2(h) of Securities Contracts (Regulation) Act, 1956, units of mutual funds are securities. Under Section 112, LTCG on listed securities are taxable at 20% with indexation benefit. Debt mutual fund units fall under this category and hence indexation benefit is allowed as per Section 48 of the Income Tax Act."
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