What is Indexation?

Indexation is a term commonly used in economics and finance to determine the present value of a property or transaction, adjusting it for the inflationary effect. Inflation means the increase in the price of a service or product. 

What are the Benefits of Indexation?

Here are a few of the benefits of the indexation for capital gain:

1. Reduced Taxes: Indexation is used to reflect the effect of inflation on investments by adjusting the purchase price. If the purchase price is higher, it means there will be fewer profits, which in turn means fewer taxes.
2. Legal tool for tax saving: This method for saving taxes is an accepted method under the Income Tax Act, and it is legal to use. It results in fewer taxes without using any fraudulent tactics.
3. Higher returns after tax: The capital gains after the indexation will be reduced, hence the profit remaining after the taxation will be more on your side.

Applicability of Indexation Benefit

Here is how the Indexation benefit is applied:

• Under the provisions of the Income Tax Act, the benefits from Indexation are only applied to long-term capital assets.
• If you have an asset for more than 24 months, then it will be considered a long-term capital asset.
• For sales after July 23, 2024, the benefits of indexation are only available for long-term capital assets, including immovable properties such as land or buildings. Only the resident individuals or HUFs can avail themselves of this option.
• You can claim indexation benefits on capital assets sold before 23 July 2024.
• You cannot claim any type of indexation benefits on the sale of the listed equity shares, units of business trusts, and equity-oriented funds. 
• The capital gains will always be considered as short-term if they are purchased on or after 1st April, 2023. Hence, they are not eligible for an indexation benefit.