5 things to know about indexation

1. Indexation is to adjust the purchase price of an investment for inflation.

2. The cost Inflation Index (CII) for every financial year is easily available on the income-tax website and is used to compute the indexation.

3. The purchase price is multiplied by the CII for the year in which the sale is made and divided by the CII for the year in which the purchase was made.


4. The indexed price so arrived at is used to calculate the capital gains on which LTCG tax of 20% plus surcharge of 10% plus education cess of 4% (22.88%) is applicable.

5. This is applicable for computing long term capital gains for non-equity mutual funds where holding period is greater than 36 months.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)