Indexation
Also called: Inflation indexation · Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Beyond NCERT
Meaning
Indexation means adjusting an amount of money for inflation by linking it to a price index. The adjusted amount could be income, a liability or the cost of an asset. It keeps people from losing out just because prices have risen. It is used in several ways:
- Wages and pensions, through Dearness Allowance and Dearness Relief.
- Tax brackets, to prevent "bracket creep". This is when inflation pushes people into higher tax slabs even though their real income has not grown.
- Capital gains, through the Cost Inflation Index (CII), so that only real gains are taxed.
- Inflation-indexed bonds, whose principal or interest is linked to a price index.
Example
When a house is sold, the CII raises its original purchase cost to today's price level, so tax falls only on the real gain. In Budget July 2024, indexation was largely removed for long-term capital gains (verify current).
Don't confuse with
- Wage indexation: this is one narrow type of indexation that applies only to wages and salaries.