Indexation — what it was and where it still applies

Indexation is an income-tax mechanism that inflates the cost base of a long-term asset using the government's Cost Inflation Index (CII), so you only pay tax on real (inflation-adjusted) gains rather than nominal gains.

How it works

The formula:

Indexed cost = Original cost × (CII of sale year / CII of purchase year)

So if you bought debt-fund units for ₹10 lakh in 2018-19 (CII = 280) and sold in 2024-25 (CII = 363), the indexed cost is ₹10 lakh × (363 / 280) = ₹12.96 lakh. If you sold for ₹14 lakh, your indexed long-term gain is only ₹1.04 lakh — taxed at 20% = ₹20,800.

Without indexation, your "gain" would be ₹4 lakh, taxed at slab — potentially ₹1.20 lakh for a 30%-bracket investor.

Where indexation no longer applies

The Finance Act 2023 removed indexation for "specified mutual funds" — primarily debt funds investing less than 35% in domestic equity, for units bought on or after 1 April 2023. Gains on such units are now taxed at slab rate regardless of holding period.

Where it still applies

• Debt-fund units bought before 1 April 2023 — the older indexation regime continues to apply to those specific units even when sold today (so long as held > 36 months).
• Gold ETFs / Gold FoFs / Sovereign Gold Bonds: indexation is no longer available on gold ETFs / gold FoFs for units bought on/after 1 April 2025 (Finance Act 2024-25 alignment). Verify the latest applicable rule before relying on it.
• Physical assets: land, real estate, gold (Finance Act 2024 changed the long-term real estate regime — refer to current rules).

The Cost Inflation Index

The CBDT notifies a fresh CII every year, typically in May or June. Historical CII values are tabulated on the income-tax department's website and used by tax-filing software and AMC capital-gains statements.