indexation adjusts the purchase price for inflation. the cost inflation index (cii) is published annually. it measures price increases over time. inflating the original cost reduces the taxable gain.
for debt mutual funds, this was once a significant advantage. the rules changed in 2023 and 2024. the benefit is now limited.
how indexation works
here is how it works. ₹1,00,000 went into a debt fund in fy 2016-17. the cii back then was 264. sold it in fy 2021-22. cii for that year was 317.
the indexed cost comes to ₹1,20,076. that is ₹1,00,000 multiplied by 317 divided by 264.
now the gain. sold for ₹1,50,000. without indexation, the gain is ₹50,000. with indexation, it drops to ₹29,924. less tax. that is the point.
under the old rules, debt funds held beyond 36 months got 20% tax with indexation.
what changed in 2023 and 2024
april 1, 2023. finance act 2023 removed indexation for debt funds bought from this date. all gains are short-term. taxed at slab rate. holding period is irrelevant.
july 23, 2024. budget 2024 changed more. for units bought before april 1, 2023, the ltcg holding period dropped from 36 to 24 months. the rate became 12.5%. no indexation.
units bought before april 1, 2023 and redeemed before july 23, 2024 still got 20% with indexation. after that, the benefit is gone.
what this means for investors
for new investments (april 2023 onwards). debt funds are less tax-efficient. the advantage over fixed deposits has narrowed. both are taxed at slab rate.
the removal of indexation has led to a sharp decline in net inflows into debt funds over the past three years. investors in higher tax brackets have been particularly affected.
for older investments (before april 2023). the 12.5% ltcg rate is still available. only if held for more than 24 months. holding periods should be considered before redemption.
what is happening in 2026
the association of mutual funds in india has asked the government to restore indexation. amfi has proposed ltcg with indexation for debt funds held over 36 months. the proposal would amend sections 2, 48, 50aa, and 112 of the income tax act.
the industry body argues this would restore parity with other long-term assets, incentivise conservative investors like retirees, and channel household savings back into the corporate bond market. as of budget 2026, no changes have been announced yet.
debt fund taxation
| purchase date | holding period | tax rate | indexation |
|---|---|---|---|
| before april 1, 2023 | 24 months or less | slab rate | no |
| before april 1, 2023 | more than 24 months | 12.5% | no |
| on or after april 1, 2023 | any period | slab rate | no |
frequently asked questions
1. do debt funds have indexation benefit in 2026 ?
no. indexation is not available for any debt fund redemption on or after july 23, 2024. pre-april 2023 funds get 12.5% ltcg. no indexation.
2. what is the ltcg rate on debt funds for 2026 ?
for pre-april 2023 funds held over 24 months. 12.5% flat rate. no indexation.
3. why was indexation removed for debt funds ?
finance act 2023 removed it to align debt funds with fixed deposits. both now taxed at slab rate. the industry has requested restoration in budget 2026.
4. what happens if a debt fund is held for 10 years after april 2023 ?
same as holding it for 10 months. all gains are short-term. taxed at slab rate. no benefit for long holding.
5. what is amfi’s proposal for budget 2026 ?
amfi has proposed restoring ltcg with indexation for debt funds held over 36 months. the tax rate would be 12.5% (or 20% with indexation). no changes have been announced yet.
