Indexation
Indexation refers to the method to adjust your money with reference to a price index to maintain the purchasing power in future, money subject to inflation. It calculates the price change between the time of purchase and the time of selling any asset and takes into account the price index, which is related to inflation.
Indexation and Capital Gain Tax
The price is more technically known as CII(Cost Inflation Index). CII is declared by the Central Government taking the base year to be 1981-82. The following products are exposed to capital gains:
- Debt Mutual Funds
- Real Estate
- Gold
- Fixed Return Instruments
- Fixed Maturity Plans
If the indexation is referred to while computing the income out of the above products, the inflation is taken into consideration and the real rate of return decreases and thus lesser amount is subject to income tax. And thus the investor is able to save some money, which he otherwise would have paid as tax.
Advantages of referring indexation:
- It prevents erosion of the value of assets
- It effectively reduces the tax liability of the investor
- It sometimes shows your monetary gain to be a loss
- It increases the real return of your investment.
