Few days back, I carried a blog post on Fixed Maturity Plan (FMPs) and its benefits. One of the benefits of FMPs was double indexation benefit in case it is invested during the end of the financial year.
To recap, double indexation is benefit of two years' of indexation for calculation of long term capital gain tax even though the investment is for substantially less than two years. For eg: In case one makes FMP investment on 29th March 2011 in 370 days FMP, the FMP will mature on 2nd April 2012. For calculating indexation benefit on capital gain tax, this investment will be considered to be made in FY10-11 and sold in FY12-13 and thus you will get benefit of two years of indexation.
However, with Direct Tax Code (DTC) the situation changes a bit. The holding period of asset is important for the purpose of determining whether it will be short term or long term. Under current tax law, holding period is difference between the selling date and buying date. If that period is more than 12 months, it is treated as long term, otherwise short term.
Now in DTC, the holding period will start from the end of the financial year in which the asset is purchase. Thus irrespective of whether the asset is purchase on 1st September 2010 or 1st March 2011, the holding period will start from 1st April 2011 and to consider the investment as long term, it should be sold after 31st March 2012.
Applying above provisions of DTC in our FMP example, the holding period will start from 1st April 2011 and the indexation benefit will be available from FY 11-12 and not from FY 10-11 as the present case. Hence the investor will get indexation for one year instead of two years.
Irrespective of the above change, FMPs do not loose their attractiveness over Fixed Deposits. Read more here.
The DTC is still in draft stages and the final provisions may vary. Further there is no clarity on treatment for assets purchased before DTC becomes applicable.
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