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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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