Indexation
Adjusting an asset's purchase cost for inflation before computing capital gains.
Indexation was withdrawn for most assets acquired on or after 23 July 2024, with a grandfathered option for older property holdings. It no longer applies to debt mutual funds.
Why Indexation matters when comparing products
Indexation significantly impacts the calculation of capital gains tax, particularly for long-term investments. Understanding its applicability, or lack thereof, helps investors compare the effective post-tax returns of various financial products like equity funds, debt funds, and real estate. This insight is crucial for assessing potential net profits and making informed decisions, especially given recent changes to its availability for certain asset classes in India.
Illustrative example
Consider an asset purchased for ₹1,00,000 and sold for ₹1,50,000 after three years. If the Cost Inflation Index adjusted the purchase price to ₹1,10,000, the taxable long-term capital gain would be ₹40,000 (₹1,50,000 - ₹1,10,000). Without indexation, the gain would be ₹50,000 (₹1,50,000 - ₹1,00,000).