Tax
What is Indexation Benefit?
The provision that recognised your ₹20 lakh in 2005 was not the same ₹20 lakh as today. It is largely gone — and a great deal of the internet has not noticed.
The short answer
Indexation adjusted your purchase price for inflation before computing the gain — recognising that ₹20 lakh in 2005 and ₹20 lakh today are not the same money.
It was abolished on 23 July 2024.
One exception survives: a resident individual or HUF, selling property acquired before that date, may still use it — paying 20% with indexation if that comes to less than 12.5% without.
For decades, long term capital gains on property were 20%, with indexation — you adjusted your purchase price for inflation, which often cut the taxable gain dramatically.
The Finance (No. 2) Act, 2024 changed that. From 23 July 2024:
• LTCG on property is 12.5%
• Indexation is abolished
• The holding period stays at 24 months
A great deal of the tax content on Indian property websites still describes the old position. It is now wrong for most transactions. Check the date on anything you read — including this page.
What indexation did
You bought a flat in 2005 for ₹20 lakh. You sell it now for ₹1 crore.
Have you made ₹80 lakh? Not really. A great deal of that "gain" is simply inflation — the rupee buys less than it did, so the same flat costs more numbers.
Indexation recognised that. It let you restate the 2005 price in today's money, using the Cost Inflation Index, and taxed only the gain above inflation.
How it worked
Indexed cost = Purchase price × (CII of sale year ÷ CII of purchase year)
- Purchase price (2005)
- ₹20,00,000
- Restated in today's money
- ≈ ₹70,00,000
- Sale price
- ₹1,00,00,000
- Gain, unindexed
- ₹80,00,000
- Gain, indexed
- ₹30,00,000
At 20%, that was ₹6 lakh — instead of 20% of ₹80 lakh.
What changed on 23 July 2024
The Finance (No. 2) Act, 2024 removed indexation and cut the LTCG rate from 20% to 12.5%.
Roughly neutral for property with moderate appreciation. Materially worse for property that has appreciated a great deal — metro land, long-held flats — because a large nominal gain is now taxed in full, with no inflation adjustment at all.
The government's argument was simplification. The industry's argument was that stripping inflation adjustment from a long-duration, illiquid asset penalises exactly the people who held it longest.
Both arguments have force. The rule is the rule.
Who still gets indexation
| Who you are | Bought BEFORE 23 July 2024 | Bought ON OR AFTER |
|---|---|---|
| Resident individual / HUF | Yes — pay the LOWER of 12.5% without indexation, or 20% with it | No. 12.5%, no indexation. |
| NRI | No. 12.5%, no indexation. | No. |
| Company / LLP / firm | No. | No. |
A narrow, grandfathered concession — and one of the few places in Indian tax where being a resident individual rather than an NRI is worth a great deal of money.
When indexation still wins
Where you have the choice, run both. As a rough guide:
- Older property → indexation more likely to win. Bought in 2005 or earlier, the indexed cost grows enormously, and 20% of a small indexed gain beats 12.5% of a large nominal one.
- Newer property → 12.5% more likely to win. Bought in 2020, there simply isn't much inflation to index away.
- Large documented improvements → indexation more likely to win. Improvement costs are indexed too.
- Very high appreciation → 12.5% often wins. The gain is real, not inflationary, and the lower rate helps more than the adjustment would.
The crossover depends on the purchase year, the appreciation and the improvement costs. There is no rule of thumb that survives contact with real numbers.
Your CA should compute the tax under both methods and show you the two figures. If they don't offer, ask.
The difference is routinely lakhs.
The Cost Inflation Index
The CII is notified each year by the Income Tax Department, under Section 48. One number per financial year.
You don't need to memorise it. You need to know it exists, that your CA will apply the right one for your purchase year and your sale year, and that the calculation is arithmetic, not judgement — so there is a right answer, and you are entitled to see it.
We have written this against the current position and checked it carefully. But tax turns entirely on your specific facts: your residential status, when you bought, when you sell, which regime you are on, and what else is in your return.
Note also that the Income Tax Act, 2025 now replaces the 1961 Act, and section numbering is changing even where the substance is not. We use the familiar numbers — 54, 54F, 24(b), 80C — because those are what people search for and what CAs still say. Confirm the current section references with your accountant.
Before you sell a property, pay a CA. On a transaction this size it is the best-value fee you will ever pay, and the cost of getting it wrong runs to lakhs.
Frequently asked questions
Is indexation benefit still available in India?
Only in a narrow case. Indexation was abolished for property on 23 July 2024. It survives for RESIDENT INDIVIDUALS and HUFs selling property acquired BEFORE that date, who may pay the lower of 12.5% without indexation or 20% with it. NRIs, companies, LLPs and firms have no indexation option at all.
What is indexation benefit?
The adjustment of your purchase price for inflation before computing capital gains, using the Cost Inflation Index. It recognised that Rs 20 lakh in 2005 and Rs 20 lakh today are not the same money, and taxed only the gain above inflation.
Why was indexation removed?
The Finance (No. 2) Act, 2024 removed it and cut the LTCG rate from 20% to 12.5% in compensation. The stated reason was simplification. The counter-argument is that removing inflation adjustment from a long-duration, illiquid asset penalises precisely those who held it longest. The trade is roughly neutral for moderate appreciation and materially worse for property that has appreciated a great deal.
Which is better — 20% with indexation or 12.5% without?
It depends on when you bought, how much it appreciated, and what you spent improving it. Older purchases and large improvement costs favour indexation. Newer purchases and very high appreciation usually favour 12.5%. There is no rule of thumb — compute both, and have your CA show you the two figures.
What is the Cost Inflation Index?
A number notified each financial year by the Income Tax Department under Section 48, used to adjust the cost of acquisition for inflation. Your CA applies the CII for your purchase year and your sale year. It is arithmetic, not judgement — so there is a right answer, and you are entitled to see it.