Capital gains tax is levied on the profits from selling assets like shares, bonds, property, and mutual funds. Gains are classified as short-term (held 12-36 months) or long-term (held over 36 months). The tax law provides indexation to reduce the tax burden on long-term capital gains. Indexation artificially inflates the purchase price of the asset using a cost inflation index to account for inflation. This lowers the taxable capital gains and resulting tax liability. Indexation benefits investors by reducing the effects of inflation on asset values over long holding periods.

10. Hope you have now understood the concept of indexation benefit. In case of any query please email to pradyumn@tataamc.com