Indexation means adjusting the purchase price of a capital asset to account for inflation between the purchase date and sale date. This adjustment reduces the capital gains amount and resulting capital gains tax liability. The purchase price is inflated using the Cost Inflation Index notified annually by the government. For a property purchased in 1996-97 and sold in 2004-05, indexation reduced the capital gains tax from Rs. 20,000 to Rs. 11,311 by inflating the purchase price from Rs. 2.5 lakh to Rs. 3.93 lakh. Indexation helps offset the erosion in asset value due to inflation over the holding period.