Indexation Benefit refers to the adjustment of the purchase price of an asset using the Cost Inflation Index (CII) to account for inflation. This concept is primarily used in calculating Long-Term Capital Gains (LTCG) under Indian income tax laws. By increasing the original cost of acquisition based on inflation, indexation effectively reduces the taxable gain when an asset such as property, debt mutual funds (prior to April 2023), or other capital assets is sold after a certain period.
This benefit is not available for all asset classes. For example, equity shares and equity-oriented mutual funds are taxed differently, and indexation is not applicable to short-term capital gains.
Indexation is especially relevant for individuals and businesses selling long-term capital assets. It helps in reducing the overall tax liability, making it a key consideration during income tax filings and investment planning. When filing returns, accurate application of the CII as notified by the Income Tax Department ensures compliance and prevents tax notices or reassessments.
Understanding indexation can also assist in better financial decision-making and estate planning. For example, when calculating capital gains for inherited property, the benefit of indexation can be claimed from the year the previous owner acquired the asset.
To explore how indexation fits into your broader income tax strategy, you can visit FinTax24’s Income Tax Solutions for more expert guidance tailored to individuals and businesses across India.