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Is indexation mandatory?

Indexation benefit is provided for capital gains on asset held for long term- 1 year or 3 year according to the asset category

Is indexation mandatory on assets like property, bonds, debentures, shares, mutual funds? Please tell me briefly in which cases it is mandatory?
- Subir Chatterjee

Indexation benefit is provided for capital gains on asset held for long term- 1 year or 3 year according to the asset category. The benefit let you index your cost of purchase with inflation. In other words, it helps you to factor in the inflation and bring your historic cost of purchase to today's value.

Generally, long-term capital gains are taxed at 20 per cent (plus surcharge and cess as applicable), but in certain special cases, the gain may be (at the option of the taxpayer) taxed at 10 per cent (plus surcharge and cess as applicable). The benefit of charging long-term capital gains at 10 per cent is available only in respect of long-term capital gains arising on transfer of any of the following asset:

(a) Any security which is listed in a recognised stock exchange in India. The securities, as defined in Section 2(h) of the
Securities Contracts (Regulation) Act, 1956, include shares, scrips, stocks, bonds, debentures, debenture stocks or other marketable securities of a like nature in or of any incorporated company or other body corporate, Government securities, such other instruments as may be declared by the Central Government to be securities and rights or interest in securities.
(b) Any unit of UTI or mutual fund (whether listed or not) sold on or before 10-7-2014.
(c) Zero coupon bonds.

In other words, in case of long term capital gain arising on these assets, the taxpayer has following two options:

a) Avail of the benefit of indexation; the capital gains so computed will be taxed at normal rate of 20 per cent (plus surcharge and cess as applicable).
b) Do not avail of the benefit of indexation; the capital gain so computed is taxed at 10 per cent (plus surcharge and cess as applicable).

The taxpayer has the option of computing the tax liability under both the options, and select the option with a lower tax liability.

For more information, read: Income From Capital Gains.

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