What is indexation benefit in MFs?

For mutual-fund investing, there is a significant tax efficiency available while computing capital gains on funds held above three years.

Let’s say you sell debt funds after three years. The gains are first adjusted for inflation (indexation). This reduces the taxable burden as capital gains are taxed at a flat 20 percent. The Cost Inflation Index is used to calculate the inflation-adjusted cost of acquisition.

The indexation benefit is available for capital gains realized in debt MFs, but only on investments made till March 31. From April 1, funds such as balanced advantage funds, which usually invest 35-65% in equities, would have indexation benefit if the holding period is above three years.