As we know that Indexation is applicable on debt funds when the holding period is greater than 3 years. Government’s Cost Inflation Index (CII) gives the inflation factor needed to compute the Indexed cost of acquisition.
The biggest benefit of Indexation is an effective reduced tax as indexation adjusts the purchase price of debt fund with respect to inflation. With Indexation, you can reduce your LTCG( Long term capital gains tax) which gives debt funds an edge over Fixed Deposits.
The higher the holding period, the more benefits indexation will have. Long-term capital gains tax on debt funds can come down from 20% to 5-7%. When you invest for more than 5 years in debt funds.