What is Indexation?

Indexation is a significant factor in determining investment profit or loss. By modifying the acquisition price of the underlying asset or investment, indexation reduces your total tax burden.

In simple words, we can say indexation is the cost of acquisition adjusted upwards to reflect the impact of inflation. 

Indexation rates are calculated using the Cost Inflation Index (CII). Cost Inflation Index (CII) is a figure issued by the Central Government every year that represents the year’s inflation. The government provides an index number for every financial year to facilitate this calculation. Let’s check out the cost inflation index for the last 22 years.

(Source: Income Tax India)

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Indexation benefit is available only for capital gains realized in mutual debt funds. They are available only for long-term capital gain. Tax is payable on long-term capital gains after indexation, at 20% plus surcharge plus education cess.