Indexation

Indexation is a technique used to adjust the purchase price of long-term capital assets to account for inflation. By using the Cost Inflation Index (CII) published by the government, the original cost is inflated to reflect current prices, thereby reducing the taxable capital gain.

Cost Inflation Index (CII)

The Central Government notifies the CII for each financial year. The base year was shifted from 1981 to 2001 starting from FY 2017-18.

Financial Year	CII
2001-02 (Base Year)	100
2019-20	289
2020-21	301
2021-22	317
2022-23	331
2023-24	348
2024-25	363

Formula for Indexation

For assets acquired before April 1, 2001, the Fair Market Value (FMV) as on April 1, 2001 or actual cost, whichever is higher, is taken as the cost of acquisition.

Example of Indexation Benefit

• Purchase Price (FY 2015-16): ₹50,00,000
• Sale Price (FY 2024-25): ₹1,00,00,000
• CII of 2015-16: 254
• CII of 2024-25: 363
• Indexed Cost: ₹50,00,000 × (363/254) = ₹71,45,669
• Capital Gain without Indexation: ₹50,00,000
• Capital Gain with Indexation: ₹28,54,331
• Tax Saved: ₹4,29,132 (20% of difference)

Assets Eligible for Indexation

• Immovable property (land, buildings)
• Unlisted shares
• Debt mutual funds (for units purchased before April 1, 2023)
• Gold and jewelry
• Other long-term capital assets

Assets NOT Eligible for Indexation

• Listed equity shares (taxed at 10% without indexation)
• Equity mutual funds
• Bonds and debentures (except capital indexed bonds)
• Debts funds purchased on or after April 1, 2023