What is indexation?

What is indexation?

Indexation is the benefit provided on long-term capital gains in various assets, including debt mutual funds. It allows investors to increase their ‘cost of acquisition’, while calculating capital gains and, thus, reduces taxable capital gains. Indexation recalculates the original value of your purchase in line with the inflation rate. Which means, less tax, and you walk away with more cash in hand.

Long Term Capital Gains on Debt funds are taxed at 20% with indexation benefit. Fund houses often emphasize the benefit of investing in debt before 31 March in order to take advantage of indexation for an additional year. For example, if you invest on 30 March 2021 and redeem on 5 April 2024, you will get the indexation benefit for four years (FY21, FY22, FY23 and FY24), even though you have held the investment for only slightly more than three years.

The historical cost-inflation table is as follows:
Financial Year
Cost Inflation Index
2001-2002
100
2002-2003
105
2003-2004
109
2004-2005
113
2005-2006
117
2006-2007
122
2007-2008
129
2008-2009
137
2009-2010
148
2010-2011
167
2011-2012
184
2012-2013
200
2013-2014
220
2014-2015
240
2015-2016
254
2016-2017
264
2017-2018
272
2018-2019
280
2019-2020
289
2020-2021
301
2021-2022
317
2022-2023
331


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