personal-finance
This inflation trick helps cut your tax burden
Oct 22, 11:10

Inflation is usually bad news for bond investors. High inflation eats into returns and makes real returns (returns less inflation) negative. But inflation helps long-term debt fund investors. Capital gains (selling price less cost price) are subject to taxes. However, indexation artificially inflates the cost price. This narrows the gap between selling price and cost price (on paper). A lower gain results in a lower tax. Higher the inflation, higher the indexed cost price.

In low interest and high inflationary times, it is better to avoid interest paying bonds as the interest gets taxed as per slab rate. Instead bond funds make better sense as the post-tax returns improve.

Use inflation to cut tax