What is indexation?

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What is indexation?
When you calculate capital gains made from the sale of a property or bonds, you can avail indexation benefit, since inflation has eaten into your profits. One is allowed to avail indexation benefits, which is calculated based on the cost inflation index. The cost inflation index is revealed every year by the government sometime in May. The table below shows you the cost inflation index, which could be helpful in computing your long term capital gains liability.

Calculating capital gains using indexation

Say you bought a property for Rs 25 lakhs in 2008 and sold it in 2012 for Rs 40 lakhs. Then your indexed cost of acquisition will work as follows: (Actual cost of purchase) x (CII year of sale)/(CII of year of purchase).

Therefore the indexed cost of acquisition in the above case would Rs 25 lakhs x 852/551 = Rs 38,65,698.

Therefore you would pay capital gains as follows: Sale price - minus indexed cost of acquisition = Rs 40,00,000 - 38,12,080 = Rs 1,34, 302. Therefore the capital gains would be 20 per cent of Rs 1,34,302 = Rs 26,860.

Table with cost inflation index since 1981-82

Year             Cost Inflation Index

1981-82        100
1982-83        109
1983-84        116
1984-85        133
1985-86        140
1986-87        150
1987-88        161
1988-89        172
1989-90        182
1990-91        199
1991-92        223
1992-93        244
1993-94        259
1994-95        281
1996-97        305
1997-98        331
1998-99        351
1999-2000    389
2000-2001    406
2001-2002    426
2002-2003    447
2003-2004    463
2004-2005    480
2005-2006    497
2006-2007    519
2007-2008    551
2008-2009    582
2009-2010    632
2010-2011    711
2011-2012    785
2012-2013    852

Long term capital gains reduces tax liability tremendously if one takes indexation into consideration. However, if you desire not to pay any capital gains on the sale of your property you can look at the option of investing in capital gains bonds, which have a lock-in of three years.

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Story first published: Saturday, February 9, 2013, 10:47 [IST]
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