Explanation – Indexation is a financial concept and practice used to adjust the value of various economic elements to account for changes in the general price level, typically due to inflation. The goal is to neutralize the effect of inflation on the asset’s value over time. By using indexation, you can adjust an investment’s purchase price to reflect the impact of inflation more accurately. This carries over into tax liability because a higher purchase price leads to lower profits and lower taxes. Adjusting for inflation using indexation allows an investor to reduce long-term capital gains, bringing down taxable income. Recently, the Finance Minister in the Budget proposed taxing all long-term gains at a flat rate of 12.5%, but without using indexation.

Source: The Hindu