| Overview: Indexation of capital gain adjusts the purchase cost of assets for inflation using the Cost Inflation Index, lowering taxable gains on property, gold, and debt funds. This tax benefit ensures investors pay only on real gains, not inflation-driven increases, helping long-term asset holders in India save significantly on capital gains tax. |
Understanding Indexation in Capital Gains Taxation
When you sell property bought years ago, the sale price may appear much higher than your original cost. However, inflation erodes money’s purchasing power over time. Indexation of capital gain adjusts your purchase cost for inflation before calculating taxable gains.
For example, consider a flat bought for ₹20 lakh in 2015. If sold for ₹35 lakh in 2025, it would have a taxable gain of ₹15 lakh without indexation. With indexation, your cost is adjusted to today’s value, reducing tax liability and ensuring you pay tax only on actual wealth creation, not paper profits.
As per the Finance Act 2024, indexation applies only to assets bought before July 23, 2024. Assets acquired on or after this date are taxed at a flat 12.5%, without indexation benefits.
What is Indexation of Capital Gain?
Indexation of capital gain is a tax calculation method that adjusts the acquisition cost of long-term capital assets using the Cost Inflation Index (CII). The Income Tax Department publishes CII values annually, with 2017-18 as the base year (CII = 100). For FY 2024-25, the CII stands at 363.
Only specific long-term assets qualify for indexation benefits:
- Immovable property (land, buildings) held over 24 months
- Gold, jewellery, and precious metals held over 36 months
- Debt mutual funds and bonds held over 36 months
- Unlisted shares held over 24 months
Cost Inflation Index Table (Recent Years)
Check the recent CII values to calculate indexed capital gains accurately for property and asset sales:
| Financial Year | CII Value |
| 2019-20 | 289 |
| 2020-21 | 301 |
| 2021-22 | 317 |
| 2022-23 | 331 |
| 2023-24 | 348 |
| 2024-25 | 363 |
Step-by-Step Indexation Calculation Method
The indexation formula adjusts your purchase cost and improvement expenses to current value terms:
- Indexed Cost of Acquisition = (CII of Sale Year ÷ CII of Purchase Year) × Actual Purchase Cost
- Indexed Cost of Improvement = (CII of Sale Year ÷ CII of Improvement Year) × Actual Improvement Cost
- Long-Term Capital Gain = Sale Value – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses)
Detailed Calculation Example
Ashish Sharma purchased a residential plot in Mumbai for ₹25 lakh in FY 2018-19 (CII: 280). He spent ₹3 lakh on boundary walls in FY 2020-21 (CII: 301). In January 2025, he sold the plot for ₹55 lakh, incurring ₹1 lakh in brokerage and legal fees.
- Step 1: Calculate Indexed Cost of Acquisition
Indexed Purchase Cost = (363 ÷ 280) × ₹25,00,000 = ₹32,41,071 - Step 2: Calculate Indexed Cost of Improvement
Indexed Improvement Cost = (363 ÷ 301) × ₹3,00,000 = ₹3,61,794 - Step 3: Calculate Capital Gain
LTCG = ₹55,00,000 – (₹32,41,071 + ₹3,61,794 + ₹1,00,000) = ₹17,97,135 - Step 4: Calculate Tax (assuming pre-July 2024 rates)
Tax = 20% of ₹17,97,135 = ₹3,59,427
Without indexation, the capital gain would have been ₹26,00,000, resulting in a ₹5,20,000 tax liability. Indexation of capital gains saved Mr Sharma ₹1,60,573 in income tax.
| Expert Tip: Always maintain detailed purchase receipts, improvement bills, and payment proofs. These documents are crucial for claiming indexation benefits during income tax assessments. |
When Indexation Benefits Matter Most
Here are the key situations where applying indexation significantly reduces your capital gains tax liability.
Asset-Wise Impact Analysis
How indexation affects capital gains tax differently for various asset types.
| Asset Type | Indexation Eligibility | Tax Rate (Pre-July 2024) | New Rate (Post-July 2024) |
| Property | Yes (grandfathered) | 20% with indexation | 12.5% without indexation |
| Gold/Jewellery | Yes (grandfathered) | 20% with indexation | 12.5% without indexation |
| Debt Mutual Funds | Yes (old units) | 20% with indexation | 12.5% without indexation |
| Equity Funds | No | 10% (above ₹1 lakh) | 10% (unchanged) |
The new tax structure creates an interesting scenario. For some assets, the flat 12.5% rate might be lower than the indexed 20% rate. This is especially for assets held for shorter durations or purchased during low-inflation periods.
Real-World Scenarios
Practical examples showing how indexation changes taxable capital gains in real transactions.
Scenario 1: Mrs Naina Gupta inherited gold jewellery worth ₹5 lakh in 2016 and sold it for ₹12 lakh in 2024. With indexation, her taxable gain reduces from ₹7 lakh to approximately ₹4.2 lakh, saving her around ₹56,000 in taxes.
Scenario 2: An urban professional considering Airtel Finance Fixed Deposit for emergency funds should understand that FD interest is taxed as income, not capital gains. However, strategic asset allocation between indexed assets and fixed deposits can optimise overall tax efficiency.
| Worth Knowing: The Cost Inflation Index has grown from 100 in 2017-18 to 363 in 2024-25, reflecting a 263% cumulative inflation adjustment over seven years. |
Common Indexation Mistakes to Avoid
Frequent errors taxpayers make when applying indexation and how to prevent them.
1. Documentation Errors
Many investors lose indexation benefits due to inadequate record-keeping. The income tax department requires original purchase documents, payment receipts, and improvement bills to validate claims.
2. Wrong CII Application
Using incorrect CII years is common. Remember:
- Use CII of the financial year when you bought the asset
- For improvements, use the CII of the year when the improvement was made
- Apply CII of the sale year for final calculations
3. Misunderstanding Eligibility
It’s important to understand the eligibility rules, since indexation doesn’t apply to:
- Short-term capital assets
- Equity shares and equity mutual funds
- Assets purchased after 23rd July 2024 (except grandfathered cases)
Wrapping Up
Understanding indexation of capital gains empowers smarter investment and tax planning. By calculating gains with inflation adjustments, you pay tax only on real wealth creation. This excludes paper profits, and it helps you optimise returns across assets.
Recent changes mean timing matters. Assets bought before July 2024 enjoy indexation benefits, while those purchased later face a flat 12.5% tax. Choosing the optimal method can reduce your tax liability, making strategic selling decisions crucial for financial efficiency.
For enhanced liquidity and flexibility, consider the Airtel Finance Personal Loan. Pair this with an indexation-aware investment strategy. It allows you to manage funds effectively. You can meet financial goals and maintain tax efficiency across your portfolio.
FAQs
1. How is indexation of capital gain calculated for inherited property?
Indexation applies from the original owner’s purchase date, not your inheritance date. Use the CII from when the property was first acquired by the previous owner for accurate income tax calculations.
2. Can NRIs claim indexation benefits on Indian property sales?
Yes, NRIs can claim indexation of capital gains on Indian property sales. This is subject to TDS provisions. Double Taxation Avoidance Agreement benefits with their resident country also apply.
3. Is indexation available for gold ETFs and sovereign gold bonds in income tax?
Gold ETFs purchased before July 2024 qualify for indexation. Sovereign gold bonds have different tax treatment and may be exempt from capital gains tax after maturity.
4. Does indexation apply to debt mutual fund units bought after July 2024?
No, indexation of capital gain is not available for debt mutual fund units purchased after 23rd July 2024. These attract a flat 12.5% LTCG tax without indexation benefits.
5. Can I choose between indexed and non-indexed tax calculation methods?
For grandfathered assets, you can choose the lower tax option. Compare 20% with indexation against 12.5% without indexation. This helps optimise your income tax liability based on specific calculations.
