Definition
Indexation and Cost Inflation Index (CII)
Indexation adjusts the purchase price of an asset for inflation using the Cost Inflation Index, reducing taxable long-term capital gains.
Indexation inflates your asset's original cost of acquisition to today's value using the government-notified Cost Inflation Index (CII), so you are taxed only on the real gain, not the inflationary part. This lowers your long-term capital gains and the tax on them.
Historically indexation applied to assets like property, gold and debt mutual funds. However, recent law changes have removed indexation for several asset classes (for example, debt funds bought after a certain date, and new property rules offer a choice between a lower rate without indexation or a higher rate with it), so the benefit now depends heavily on the asset and purchase date.
Because the rules have shifted, always check the current treatment for your specific asset and acquisition date before relying on indexation.
Related terms
- STCG vs LTCG by Asset ClassCapital gains are short-term or long-term depending on how long you hold an asset, and the holding period and tax rate differ by asset class.
- Capital Gains TaxCapital gains tax is the tax you pay on the profit from selling an asset such as shares, mutual funds, gold or property.
- InflationInflation is the rate at which the general level of prices rises over time, steadily eroding the purchasing power of money and the real value of savings.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.