Why index.
Just as Government announces DA (twice annually) to cover inflation, Government announces an Inflation Index annually to cover inflation in cost over time. So our cost of long term assets is always kept in reality to cover inflation.
Cost Inflation index is announced every year. We find Indexed cost by formula
Index Cost = Cost * Cost Inflation Index of Sale Year (current year)
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Cost Inflation Index of Purchase Year
Where purchase year is 2001, Purchase Year Index is taken for 2001.
The Table is available on Income Tax site, but given here for my use.