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What Does Indexation Mean? Know About Benefits and Recent Revisions
- Published on: 22 Aug 2024
Knowing what indexation means is important to enjoy tax savings and gains on your investments. While this applied to debt mutual fund investments and purchase of property, stocks, shares, and other capital assets, the benefit has changed after the recent Budget announcement.
Read on to understand what indexation means, its benefits, calculations, and the most recent changes.
The definition of indexation can be a little abstract as it refers to a system where one thing’s value changes in relation to another standard or value. You can comprehend it better by understanding its role in price adjustment against inflation. It aims to better manage the calculation of your real returns when you invest in something and then sell it after a certain period of time.
Let’s understand this with an example. Say you made a lump sum investment in a debt mutual fund scheme for ₹2 lakh. After 3 years, you sell it for ₹2.5 lakh, earning a total profit of ₹50,000. This earned profit is subject to taxation according to tax norms.
However, the current price of the same mutual fund scheme for the same number of units is ₹2.1 lakh due to inflation. As per the current rate, your total taxable profit is ₹40,000. Thus, you can save tax on the difference of ₹10,000 between the indexed and unindexed value of gains.
Also Read: Tax Saving Investment Options
To enjoy this benefit, all you need to know is a simple mathematical formula, which is easy to compute manually. To get started, you need these two key details about your investment:
Cost of acquisition means the price at which you started an investment or purchased a property, including all charges. To get the CII, you can use the following table:
| Financial year | Cost Inflation Index |
|---|---|
| 2001-02 | 100 |
| 2002-03 | 105 |
| 2003-04 | 109 |
| 2004-05 | 113 |
| 2005-06 | 117 |
| 2006-07 | 122 |
| 2007-08 | 129 |
| 2008-09 | 137 |
| 2009-10 | 148 |
| 2010-11 | 167 |
| 2011-12 | 184 |
| 2012-13 | 200 |
| 2013-14 | 220 |
| 2014-15 | 240 |
| 2015-16 | 254 |
| 2016-17 | 264 |
| 2017-18 | 272 |
| 2018-19 | 280 |
| 2019-20 | 289 |
| 2020-21 | 301 |
| 2021-22 | 317 |
| 2022-23 | 331 |
| 2023-24 | 348 |
| 2024-25 | 363 |
If you have all the information available, simply use this formula:
Indexation = Cost of acquisition x (CII of the base year / CII of the sale year)
Since inflation is always rising, your indexed cost of acquisition (ICoA) will be higher than the original investment amount. Therefore, when you subtract this ICoA from your long-term capital gain, the subtracted amount is the profit you do not have to pay tax on.
Also Read: What is Advance Tax?
This system was beneficial in lowering the tax outgo on profits from capital gains. Here’s how it helped:
As per the Budget 2024, the sale of property can only enjoy indexation benefits if you have purchased it before July 23, 2024. After this, property owners will need to pay 12.5% long-term capital gains tax without any indexation benefit.
In addition, the Budget 2023 eliminated this benefit on debt mutual funds that are bought after April 1, 2023. Earlier, profits from your investments in such schemes were taxed at 20% with indexation benefits.
Today, indexation benefits are no longer valid on investments in property, mutual funds, gold and more. However, you now pay lower long-term capital gains tax, which helps to adjust the benefit.
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Here are the steps to understand its process:
As such, you can reduce your tax liability significantly.
This means that your total long-term capital gains from debt fund investment are taxable at a 20% rate after indexation. This benefit has now been abolished by the Indian Government.
When you sell a property, you have to pay tax on the total gains. By indexation, you get the benefit of adjusting your profit against inflation. This lowers your taxable profit and, thus, your total tax. As per the Budget 2024, this benefit is no longer applicable. However, if you have purchased a property before July 23, 2024, you can choose between paying 20% long-term capital gains tax with indexation benefits or a 12.5% tax.
