Indexation adjusts the original cost of a long-term capital asset for CPI inflation using the Cost Inflation Index (CII), reducing taxable LTCG. Budget 2024 removed indexation for most asset classes effective 23 July 2024 — a major regime shift Indian taxpayers must understand.
Worked INR example (pre vs post 23 Jul 2024)
Sale of unlisted real estate bought in FY 2015-16 for ₹50 lakh, sold FY 2024-25 for ₹1.20 cr. CII 2015-16 = 254; CII 2024-25 = 363. Indexed cost = 50 × 363/254 = ₹71.46 lakh. Indexed LTCG = ₹48.54 lakh × 20% = ₹9.71 lakh tax. Without indexation under new regime: LTCG ₹70 lakh × 12.5% = ₹8.75 lakh. Taxpayer can choose lower of the two for property bought before 23 July 2024 (grandfathering).
When to use
- Selling real estate / gold / debt MFs held long-term
- Comparing pre-2024 grandfathered vs new 12.5% no-indexation regime — compute both
- Estate-planning step-up where indexation continues to apply
SEBI / tax caveat
Indexation removed for debt MFs from 1 Apr 2023 (all gains taxed at slab). For non-equity assets bought before 23 July 2024 and sold after, the choice between 20% with indexation vs 12.5% without indexation applies (Finance (No. 2) Act 2024). Listed equity never had indexation.
Related terms: Indexation Benefit, LTCG, Capital-Gains Grandfathering.