Indexation:
The changes in the long-term capital gains (LTCG) tax regime, particularly the withdrawal of the indexation benefit, has emerged as one of the most contentious decisions announced in the Union Budget for 2024-25.
- Indexation is the process of adjusting the original purchase price of an asset or investment in order to neutralise the impact of inflation on it.
- Inflation reduces the value of money over time, and therefore, when an asset is sold or an investment is redeemed, indexation helps in arriving at the cost of acquisition with the impact of inflation over the holding period factored in.
- The cost of acquisition thus arrived at, is called the indexed cost of acquisition. It resets the base for calculation of gains or losses from the sale or redemption.
- The returns calculated on the indexed cost of acquisition are generally seen as more realistic than absolute gains calculated on the basis of the actual price at the time of purchase.
- Indexation is an efficient way of preventing draining of your returns on investments in the form of taxes.
- Indexation is applicable to long-term investments, which include debt funds and other asset classes. Indexation helps in adjusting the purchase price of the investments.
