Indexation Benefit (Capital Gains)

Indexation benefit is the inflation-adjustment mechanism in India's capital-gains tax framework that reduces the taxable gain by adjusting the cost of acquisition for inflation over the holding period. The adjustment uses the Cost Inflation Index (CII), notified annually by the Central Board of Direct Taxes (CBDT) under Section 48, Explanation (v) of the Income Tax Act, 1961.

Statutory Basis

Section 48 of the Income Tax Act permits the deduction of "indexed cost of acquisition" in computing LTCG for specified asset classes. The indexed cost formula is:

Indexed Cost = Actual Cost x (CII of Year of Sale / CII of Year of Acquisition)

The CII base year is FY 2001-02 = 100. CBDT notifies the CII for each financial year. For FY 2024-25, CII = 363 (CBDT Notification No. 44/2024, May 2024).

Source: Section 48, Explanation (v), Income Tax Act 1961; CBDT Notification No. 44/2024.

Finance Act 2024: Major Change to Indexation Rules

The Finance Act, 2024 (23 July 2024) made a significant change: indexation benefit was removed for most capital assets going forward. The new default is a flat 12.5% LTCG rate without indexation.

Asset	Pre-FA-2024	Post-FA-2024 (transfers on/after 23 Jul 2024)
Listed equity / equity MF	10% without indexation (Section 112A)	12.5% without indexation -- no change in indexation treatment
Physical gold / gold ETF	20% with indexation	12.5% without indexation
Real estate (acquired before 23 Jul 2024)	20% with indexation	Choice: (a) 12.5% without indexation, or (b) 20% with indexation -- taxpayer picks lower tax
Real estate (acquired on/after 23 Jul 2024)	N/A (new)	12.5% without indexation only
Debt MF (equity less than 35%)	20% with indexation (before Apr 2023)	Slab rate (FA 2023 removed indexation; FA 2024 did not restore it)

Source: Finance Act 2024, Section 112 amendment; proviso for pre-23-Jul-2024 property.

The Transitional Choice for Pre-23-July-2024 Property

For residential and commercial property acquired before 23 July 2024 and sold in FY 2024-25 or later, the taxpayer may choose between: Option A -- 12.5% LTCG without indexation; or Option B -- 20% LTCG with indexation (indexed cost using CII). The taxpayer picks whichever gives lower tax. For properties held for many years with significant CII uplift, Option B often yields lower absolute tax. For recently purchased properties, Option A is typically lower.

Worked Example: Real Estate (Pre-23-Jul-2024 acquisition)

Property bought in FY 2005-06 for Rs 30 lakh (CII 2005-06 = 117). Sold in FY 2024-25 for Rs 1.5 crore (CII 2024-25 = 363).
Indexed cost = Rs 30 lakh x (363 / 117) = Rs 93.08 lakh.
Option A (12.5%, no indexation): LTCG = Rs 1.5 cr minus Rs 30L = Rs 1.2 cr. Tax = 12.5% x Rs 1.2 cr = Rs 15 lakh.
Option B (20%, with indexation): LTCG = Rs 1.5 cr minus Rs 93.08L = Rs 56.92 lakh. Tax = 20% x Rs 56.92L = Rs 11.38 lakh.
Option B is lower by Rs 3.62 lakh in this example. (Illustration only; surcharge and cess apply.)

CII Table (Recent Years)

FY	CII
2001-02 (base)	100
2010-11	167
2015-16	254
2020-21	301
2022-23	331
2023-24	348
2024-25	363

Source: CBDT notifications; incometax.gov.in CII page.

Related terms: LTCG, STCG, How to Reduce LTCG Tax, Tax on Investments in India, Surcharge (Income Tax).