What is indexation benefit in capital gains?

Indexation is a method that adjusts the purchase price (cost of acquisition) of an asset for inflation using the Cost Inflation Index (CII) notified by the government each year. By inflating the original cost, indexation effectively reduces the capital gain and thereby reduces the tax liability this is the 'indexation benefit.'

How Indexation Works

Indexed Cost of Acquisition = (Original Purchase Price × CII of Year of Sale) ÷ CII of Year of Purchase

Example: Property bought in FY 2010-11 for ₹30 lakh. CII of 2010-11 = 167. Property sold in FY 2024-25. CII of 2024-25 = 363.
Indexed Cost = (₹30,00,000 × 363) ÷ 167 = ₹65.2 lakh (approx)
LTCG = ₹90L (sale price) – ₹65.2L (indexed cost) = ₹24.8L instead of ₹60L without indexation.

Indexation Benefit After July 23, 2024 Amendment

• Property acquired before July 23, 2024: Optional — choose between 20% with indexation OR 12.5% without.
• Property acquired on or after July 23, 2024: No indexation only 12.5% without indexation.

Indexation benefit is a powerful tax-saving tool for long-term property holders. With the new dual option for pre-July 2024 properties, sellers should calculate tax under both methods and choose the more favourable one.