What Is Indexation and How It Reduces LTCG Tax
Indexation explained: Cost Inflation Index, long-term capital gains tax reduction, calculation formula, and eligible assets.
Understanding Indexation
Indexation is a tax benefit that adjusts your asset's purchase price for inflation before calculating capital gains tax. It's available when you sell assets held for more than 2 years (long-term).
Example: You buy a property for Rs. 50 lakh in 2000 and sell for Rs. 2 crore in 2024. Without indexation, your gain is Rs. 1.5 crore. With indexation, your cost becomes Rs. 2.5 crore (after inflation adjustment), so taxable gain might be Rs. 75 lakh—reducing your tax significantly.
The benefit: Your tax is calculated on real gains (above inflation), not nominal gains (including inflation-driven increase).
The Indexation Formula
Indexed Cost Calculation
Indexed Cost = Original Cost × (CII of Sale Year / CII of Purchase Year)
Then:
Long-term Capital Gain = Sale Price - Indexed Cost
Finally:
Tax = 20% of Long-term Capital Gain (for most assets) + 4% cess
Example: Property Indexation Benefit
Scenario:
- • Purchase year: 2012 (CII = 852)
- • Sale year: 2024 (CII = 1,948)
- • Purchase price: Rs. 50 lakh
- • Sale price: Rs. 1.5 crore
Without Indexation:
Gain = Rs. 1.5 crore - Rs. 50 lakh = Rs. 1 crore
Tax @ 20% = Rs. 20 lakh
With Indexation:
Indexed cost = Rs. 50L × (1,948/852) = Rs. 1.143 crore
Gain = Rs. 1.5 crore - Rs. 1.143 crore = Rs. 3.57 crore
Tax @ 20% = Rs. 7.14 lakh (Tax saved: Rs. 12.86 lakh!)
Which Assets Qualify for Indexation?
Eligible
- • Immovable property (land, building)
- • Gold and gold bonds
- • Listed securities / bonds
- • Units of mutual funds (debt)
- • Specified immovable property
NOT Eligible
- • Equity mutual funds
- • Listed shares (up to 2 years)
- • Unlisted shares
- • Movable property (except gold)
- • Assets held <2 years
Cost Inflation Index (CII) Basics
CII is released annually by the Indian Income Tax Department. It reflects inflation over the preceding 12 months. Using CII, the government adjusts your purchase price to current rupees.
For example, if CII in 2012 was 852 and in 2024 it's 1,948, inflation adjustment factor is 1,948/852 = 2.29. Your Rs. 50 lakh purchase becomes equivalent to Rs. 1.143 crore in 2024 purchasing power.
Frequently Asked Questions
Who is eligible for indexation benefit?
Indexation is available for long-term capital gains (>2 years) on specified assets: immovable property, gold, bonds, listed securities. It's available to residents. Non-residents can claim for property in India.
How is indexation calculated?
Indexed cost = Original cost × (CII of year of sale / CII of year of purchase). Long-term capital gain = Sale price - Indexed cost. Tax is 20% on this gain.
Can I claim indexation on mutual funds?
Equity mutual funds don't get indexation benefit. Debt mutual funds held >3 years get indexation. Equity funds above 2 years get 0 tax (up to Rs. 1 lakh annual limit) or no indexation—check current rules.
What is Cost Inflation Index (CII)?
CII is an inflation index released annually by Indian tax department. It adjusts your purchase price for inflation. Higher CII in sale year = higher indexed cost = lower taxable gain = lower tax.
Related Concepts
Related Tools
Capital Gains Calculator
Calculate your long-term capital gains tax with indexation benefit.