Some important concepts before we look at indexation:
INFLATION: It refers to the gradual increase in the prices of goods and services over a period of time.
CAPITAL GAIN: It refers to an increase in the value of an investment over a specific time period.
Indexation refers to adjusting the purchase price of a debt fund so as to reflect the effect of inflation on it. It reduces the overall tax liability by adjusting the purchase price of the underlying asset. A higher purchase price means lesser capital gain, which effectively means lesser tax.