How Indexation adjusts for Inflation and Benefits by lowering income tax

What is Indexation & How it benefits You

Imagine the following scenario:

  • You invested Rs. 1,00,000 exactly 1-year ago in a 366 day deposit
  • Today the investment matures and you received Rs. 1,09,000 as maturity amount, thereby, earning a 9% interest
  • The inflation during the same period was 8% i.e. today Rs. 1,08,000 has same purchasing power as Rs. 1,00,000 had a year ago!!

What is your real return from the above fixed deposit?

Is it fair to be charged Income Tax on the entire Rs. 9,000 gain you earned from the Fixed Deposit?

Are there options available where Income Tax is charged only on "REAL" gains?