Income tax saving: Sold land, house or jewellery? Know how indexation benefit can help you lower your long-term capital gains
inflation has reduced the purchasing power of Rs 100 over the years. So why should you pay income tax on long-term capital gains without factoring in inflation? Rather than inflationary gain, it is fair to pay income tax only on real gain. This is why the Income Tax law allows you to take advantage of indexation. It helps you to get a discount for inflation over the current price of the asset and get the inflation-adjusted present value of your capital gains.
«Indexation is a mechanism which is used to adjust the current price of a capital asset to reflect the effect of inflation on it in comparison to the date of its actual purchase. With the help of indexation, one can lower the Long-Term Capital Gain (LTCG) and corresponding tax applicable on it at the time of sale of such capital asset,» says Daizy Chawla, Managing Partner, S&A Law Offices.
So, you must use indexation to your advantage and pay a lower long-term capital gains tax. However, do note that this benefit is not available for every capital asset.
How does indexation work?
As per income tax laws, the indexation benefit is only available for long-term gains from capital assets. Regarding short-term gains from capital assets, you must note that indexation benefit is not available.
Ravi Sawana, Associate Partner, Lakshmikumaran & Sridharan (LKS), a law firm explains the concept of indexation with an example:
The example is about LTCG from the sale of a debt-oriented mutual fund which was bought in 2012.
10,000 Units of a debt mutual fund were purchased
