What is Indexation?

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.      

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