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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