New Delhi, Aug. 2 -- Inflation eats into your return on invetsments. Indexation is a process that allows to inflate the purchase price of the asset to take into account the impact of inflation. Indexation considers the inflation from the time you invested in the asset till the time you sell it. Government uses Cost Inflation Index (CII) for the purpose of inflation. CII measures the rate of inflation in the economy. The value of the index is determined by the Central Government and is increased every year to reflect inflation.

How indexation helps to reduce tax outgo?

Once the purchase price of the scheme is inflated, the capital gains on selling the scheme reduces for taxation purposes. And lower capital gains means lower tax liability...