InvestorQ : Can you explain indexation with respect to capital gains calculation?
Abhisha Yadav made post

Can you explain indexation with respect to capital gains calculation?

Answer
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Bhavika Nehru answered.
1 year ago


When it comes to calculation of capital gains tax, an important concept to understand is about the indexation of capital gains. Let us understand the concept of indexation first! Assume that you bought a property in May 2008 at Rs.75 lakhs. After 10 years you sell your property in May 2018 at Rs.1.75 crore. However, you are appalled to read that you will have to pay 20% tax on your profits. You make a quick mental calculation and your heart sinks when you realize that you will end up paying a whopping Rs.20 lakhs (20% of Rs.1 crore profit) as tax to the government of India. That is when your financial advisor asks you not to worry since there is the benefit of indexation available to you, which will reduce the tax that you have to pay on your profits on sale of property. First the annual index numbers…

FY2001-02

FY2002-03

FY2003-04

FY2004-05

FY2005-06

FY2006-07

100

105

109

113

117

122

FY2007-08

FY2008-09

FY2009-10

FY2010-11

FY2011-12

FY2012-13

129

137

148

167

184

200

FY2013-14

FY2014-15

FY2015-16

FY2016-17

FY2017-18

FY2018-19

220

240

254

264

272

280

What cost inflation indexation does is to index your cost of acquisition upwards based on an accepted inflation index and then use that to inflate your cost. Your revised capital gains are calculated on this inflated cost so as to reduce your incidence of tax. Remember that this facility is not available to equity and equity funds since the LTCG tax at 10% is a flat tax and it already provides a flat exemption of Rs.1 lakh each year.