Budget 2024: What does indexation mean? How does it work in real estate?

Indexation benefits will continue to apply to properties purchased before April 1, 2001, but not to those purchased after that date

Finance Minister Nirmala Sitharaman on Tuesday introduced several changes to the long-term capital gains tax. One of the major changes in this was the removal of indexation benefits on the sale of the property.  

Although the long term capital gain tax (LTCG) rate was reduced from 20 per cent (with indexation) to 12.5 per cent (without indexation), the move was widely criticised on social media. It also led to a fall in the share prices of major real estate developers in India.

What is indexation in real estate?

Indexation refers to the adjustment of the cost of an asset for inflation while calculating capital gains for taxation purposes in India. In real estate, this asset can be any property.

How does indexation work?

When a person sells a property, the profit they make – called a capital gain – is typically calculated as the difference between the selling price and the indexed cost of acquisition.

Every year, the Centre notifies a Cost Inflation Index (CII). This index takes into account inflation rates and is used to adjust the purchase price of an asset for inflation over the years.

To calculate capital gains tax, a person is allowed to adjust the original purchase price of the property using the CII. This adjusted price is known as the indexed cost of acquisition.

The capital gains are then calculated as the difference between the selling price of the property and the indexed cost of acquisition. A 20 per cent tax was levied on these capital gains.

How does indexation benefit?

Indexation is beneficial as it allows the taxpayers to account for the decreased value of money over time due to inflation, thereby reducing the taxable amount of capital gains and the resulting tax liability.

What changes with Budget 2024?

From July 23, sellers will not be able to avail the indexation benefit on their property. This means they would have to pay a 12.5 per cent tax on the difference between the selling price of the property and its original price.

Later the ministry clarified that indexation benefits would be available on properties bought before April 1, 2001. However, for those who bought properties after 2001, indexation benefits would no longer be applicable.