Indexation is a tax benefit that adjusts your cost of acquisition for inflation using the Cost Inflation Index (CII) published by the income-tax department each year. By inflating the cost base, indexation reduces the taxable capital gain.
Indexed Cost = Original Cost × (CII of Sale Year ÷ CII of Purchase Year)
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Taxable LTCG = Sale Price − Indexed Cost
Example
Bought shares for ₹1,00,000 in FY2019 (CII 289). Sold in FY2024 (CII 363). Indexed cost = ₹1,00,000 × (363 ÷ 289) = ₹1,25,606 If sale price = ₹2,00,000 → taxable gain = ₹74,394 (not ₹1,00,000)
What changed after Budget 2024
For unlisted shares sold after 23 July 2024, indexation is no longer available. The new regime is a flat **12.5% LTCG** with no indexation. The prior regime (20% with indexation) applies only to sales before 23 July 2024.
For other asset classes (debt funds, property), indexation rules have their own separate history — check the applicable Finance Act.
Example: An investor who sold unlisted shares in April 2024 (before the Budget change) could still use indexation to reduce a ₹5 lakh gain to ₹3.5 lakh on paper — saving significant tax compared to the post-July flat rate.