What is Indexation?

About Indexation:

• It 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. 

What is capital gains tax?

• A capital gains tax is a tax imposed on the sale of an asset. It is calculated as the difference between the sale price of the property and its purchase price.
• Any gain or loss incurred from the sale of a house property may be subject to tax under the 'Capital Gains' head. 
• Types: Depending on the period an asset is held with the owner, there are two types of capital gains - Short-term Capital Gains and Long-term Capital Gains.