Indexation Benefit – The Devil Is In The Details

The finance bill presented in July 2024 has proposed doing away with the indexation benefit for properties purchased after 2001, while reducing the long-term capital gains tax from 20% to 12.5%. This has stirred quite a bit of anxiety and debate.

Indexation benefit provided a sort of revaluation of the property to account for inflation between the date of purchase and the date of sale.

Let us say a property bought in 2005 was sold in 2023. If the property were purchased for INR 1,000,000, it would be valued at approximately INR 3,000,000 in 2023 due to indexation. If the sale price of such property were INR 4,000,000, the long-term capital gains tax would have been INR 200,000 (with indexation, and computed at 20% of INR 1,000,000). Assuming no indexation benefit, the long-term capital gains tax would be INR 375,000 (computed at 12.5% of INR 3,000,000). Here the indexation benefit results in lower tax.