Indexation in Income Tax: Meaning, Formula, Calculation and Rules

6 min read•Updated on 4th Nov, 2026•by Team Angel One

Indexation adjusts an asset’s acquisition cost for inflation using the Cost Inflation Index (CII) to calculate taxable capital gains, where permitted under current tax rules.

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Indexation is the process of adjusting an asset's original cost for inflation when calculating capital gains tax. It is based on the Cost Inflation Index (CII), a figure which the government publishes each financial year.

When an asset is eligible, this index increases its cost of acquisition, reducing the taxable gain and the tax payable. Since 2023, the rules concerning who can benefit from this provision have become much more restricted, so it is now more important to know where indexation still applies than to know the formula.

Key Takeaways

The cost of an asset is increased by reference to the Cost Inflation Index, meaning tax is paid only on the gain remaining after allowing for inflation.
For properties purchased before July 23, 2024, only resident individuals and resident HUFs can choose between the 20% LTCG tax rate with indexation and the 12.5% rate without indexation. NRIs, LLPs, and companies are not eligible for this grandfathering benefit.
Debt mutual funds bought on or after April 1, 2023, are no longer entitled to indexation benefits and are instead taxed at the investor's income tax bracket.
Equity shares and equity mutual funds have always been exempt from indexation, and long-term gains on them are taxed at a flat rate, regardless of inflation.
The decision between indexed and non-indexed tax treatment for property depends on how long the asset has been held and how much its price has changed relative to inflation.

What is Indexation in Income Tax

Indexation increases an asset's cost to account for inflation between the year it was purchased and the year it was sold.

The government publishes the Cost Inflation Index (CII) each year for this adjustment. If you multiply the original cost by the ratio of this year's CII to the CII of the year of purchase, you will obtain the indexed cost of acquisition.

To calculate the taxable gain, you deduct the indexed figure (rather than the original purchase price) from the sale value. Because prices tend to rise each year, the indexed cost is usually higher than the original cost, which reduces the taxable gain.

Which Assets Still Get Indexation Benefit?

Immovable Property (Land & Building)
- Pre-July 23, 2024 Purchases: Eligible for indexation only if you choose the legacy 20% tax rate instead of the new flat 12.5% rate.
- Critical Resident Distinction: This choice between 20% with indexation and 12.5% without indexation applies strictly to Resident Individuals and Resident HUFs. Non-Resident Indians (NRIs) do not get the indexation choice and are governed by specific non-resident capital gains rules.
- Post-July 23, 2024 Purchases: Indexation is completely unavailable; a flat 12.5% LTCG rate applies.
Debt Mutual Funds & Specified Mutual Funds
- Purchased Before April 1, 2023: Debt funds purchased before April 1, 2023, do not retain indexation benefits if sold on or after July 23, 2024.
- Purchased On or After April 1, 2023:
  - Specified Mutual Funds (Equity exposure less than 35%): Do not receive indexation. Under current tax rules, gains from these funds are classified as short-term capital gains (STCG) regardless of the holding period and are taxed at your applicable income tax slab rates.
Gold, Physical Jewellery, & Unlisted Shares
- Post-July 23, 2024 Purchases: Gold, physical jewellery, and unlisted shares purchased on or after July 23, 2024, have lost indexation benefits entirely and are taxed at a flat 12.5% for long-term capital gains.
- Pre-July 23, 2024 Purchases: Unlike land and buildings, pre-July 23, 2024 purchases of gold and unlisted shares do not receive the grandfathering indexation option (the choice of 20% with indexation was granted exclusively to immovable properties).
Listed Equity Shares & Equity-Oriented Mutual Funds
- All Periods: Subject to a flat 12.5% LTCG rate with no allowance for indexation (updating the prior 10% regime).

How to Calculate Indexed Cost of Acquisition

The formula stays the same across asset types:

Indexed Cost of Acquisition = Cost of Acquisition X (CII of the year of sale ÷ CII of the year of purchase)

Here is what each part means:

The cost of acquisition is the original amount paid for the asset.
The index value for the year the asset was sold is the value for the financial year to which the sale relates.
The capital investment index for the year in which the asset was purchased is the index value for the financial year in which the asset was bought.

Capital Gains Example (FY 2024-25 and FY 2025-26)

Suppose a plot was purchased in FY 2012-13 for ₹20,00,000 (Cost Inflation Index or CII = 200) and sold in FY 2024-25 for ₹55,00,000 (CII = 363).

Option 1: With Indexation (20% Tax Rate)

Indexed Cost of Acquisition

Indexed Cost = Actual Purchase Cost × (CII of Sale Year ÷ CII of Purchase Year)

₹20,00,000 × (363 ÷ 200) = ₹36,30,000
Long-Term Capital Gain

Long-Term Capital Gain = Sale Price − Indexed Cost of Acquisition

₹55,00,000 − ₹36,30,000 = ₹18,70,000
Tax at 20% on Indexed Capital Gain

Tax = ₹18,70,000 × 20% = ₹3,74,000

Option 2: Without Indexation (12.5% Tax Rate)

Capital Gain

Capital Gain = Sale Price − Actual Purchase Cost

₹55,00,000 − ₹20,00,000 = ₹35,00,000
Tax at 12.5% on Capital Gain

Tax = ₹35,00,000 × 12.5% = ₹4,37,500

For this example, the tax liability under the indexation method is ₹3,74,000, compared with ₹4,37,500 under the 12.5% tax rate without indexation. Therefore, the indexation method results in a lower tax liability by ₹63,500.

Note for FY 2025-26

If the property is sold in FY 2025-26, assuming a CII of 376, the calculation would be as follows:

Indexed Cost of Acquisition = ₹20,00,000 × (376 ÷ 200) = ₹37,60,000

Long-Term Capital Gain = ₹55,00,000 − ₹37,60,000 = ₹17,40,000

Tax at 20% = ₹17,40,000 × 20% = ₹3,48,000

Under these assumptions, the indexation method continues to result in a lower tax liability.

Note: The option to calculate tax at 20% with indexation for eligible properties acquired before July 23, 2024, is available only to resident individuals and Hindu Undivided Families (HUFs), subject to the applicable legal provisions. The comparison above excludes surcharge and cess. Actual tax liability may vary depending on the taxpayer's eligibility and other applicable provisions.

Factor	20% With Indexation	12.5% Without Indexation
Applies to	Property bought before July 23, 2024	Property bought before July 23, 2024 (as an alternative), and all property bought on/after that date
Tax base	Gain after cost is adjusted for inflation	Gain on the original, unadjusted cost
Best suited for	Assets held a long time with high inflation gap	Assets where price rise has outpaced inflation by a wide margin
Choice available	Yes, for pre-23 July 2024 purchases	Always available
Calculation effort	Higher, needs CII lookup	Lower, straightforward subtraction

What Changed After The 2023 And 2024 Tax Updates

Two distinct changes altered the rules on indexation within about a year of one another. The Finance Act 2023 removed indexation from debt mutual funds purchased on or after April 1, 2023, so gains are treated as short-term even if the units have been held for a long time.

Later, the gains from property sales on or after July 23, 2024, were subject to a flat 12.5% rate without indexation, except in the case of individuals and Hindu Undivided Families who bought the property before that date and who are still able to opt for the previous rate of 20% with indexation.

Equity investments were never included in the indexation scheme, and long-term gains on listed shares and equity mutual funds have always been subject to a flat tax rate that depends solely on the length of time the shares are held, not on inflation.

Conclusion

Indexation has shifted from a general method of saving on taxes to a more limited use. It is now mainly applied to the sale of older property and to debt funds purchased before April 2023. In all other cases, the taxable gain is simply the difference between the sale price and the purchase price, without any adjustment for inflation. To see which method saves more, compare the purchase date with July 23, 2024 and calculate both tax options before submitting the return.

FAQs

Does indexation apply to property that has been inherited?

For inherited property, the cost of acquisition is the amount paid by the original owner, and the holding period includes the time the property was held by that person. Indexation, if it still applies, is then worked out from the year the original owner purchased the property, not from the date of inheritance.

Can NRIs claim the 20% indexation option on real estate purchased before July 23, 2024?

No, NRIs cannot claim the 20% long-term capital gains tax rate with indexation for property purchased before July 23, 2024. The grandfathering benefit is restricted to resident individuals and resident Hindu Undivided Families (HUFs). NRIs are subject to the 12.5% rate without indexation.

Once a return has been filed, can an individual switch from the indexed option to the non-indexed option?

The choice may be changed by filing a valid revised return within the prescribed deadline, where permitted. A rectification request cannot generally be used to change a valid tax position simply because the taxpayer has changed their mind.

Is indexation provided for gold or jewellery?

Although physical gold and jewellery held for over 36 months are considered long-term assets, capital gains from them are now subject to the same tax rules as other non-property assets.

Does indexation reduce tax on short-term capital gains?

Indexation only applies to long-term capital assets. Short-term gains are added to total income and taxed.

If CII values are unavailable for very old purchase years, how is the cost calculated?

For assets bought before April 1, 2001, the cost of acquisition can be taken as the fair market value on April 1, 2001, and indexation is then applied from that year's CII instead of the actual purchase year.

Can indexation lead to capital loss rather than gain?

Yes, it can. In such a case, if the indexed cost of acquisition is higher than the sale price, the transaction gives rise to a long-term capital loss, which may be carried forward and used to offset long-term capital gains in future years.