Indexation benefit is applicable to debt funds when held for more than 3 years. It increases the cost of purchase based on the inflation index so that the gains considered for taxation is reduced hence increasing your overall gains. For example : if you invested Rs.100000 in a debt fund and it's current value after 3 years is Rs.150000. Your actual gains are Rs.50,000, but that is not what will be taxed. Based on Inflation index (say 8%) the original invested amount would be increased to 125,971.20. So the taxable amount will be reduced to Rs.24028.80.