Indexation is a method used in Indian taxation to adjust the purchase price of an asset for inflation. This helps taxpayers reduce their capital gains liability when selling long-term capital assets like property, mutual funds, or bonds. The goal is to ensure that you are taxed only on the real profit (after accounting for inflation), not on the inflated nominal gain.
In practical terms, when you sell a long-term capital asset (held for more than 24 or 36 months, depending on the asset type), the Income Tax Department allows you to use the Cost Inflation Index (CII) to recalculate the asset’s purchase cost. This adjusted cost, known as the indexed cost of acquisition, is then deducted from the sale price to calculate the taxable capital gain.
Indexation is particularly relevant during Income Tax Return (ITR) filing and capital gains computation. Small business owners and first-time investors often use it to lawfully reduce their tax burden on investments made several years ago. It’s a smart and compliant way to manage tax liabilities in a rising economy.
To learn more about how indexation affects your capital gains and filing obligations, you can explore FinTax24’s income tax solutions for expert assistance.
Indexation applies only to long-term capital assets, and is not available for short-term gains or for certain types of investments like equity shares (where flat tax rates apply). Understanding when and how to apply indexation can make a significant difference in your overall tax savings.