The Government of India took away indexation from real estate investments through a proposal in the Budget 2024. After collecting feedback, the Government retracted and allowed indexation benefit to properties bought before July 2024.
How Will the Capital Gains from Real Estate Be Taxed?
For properties sold before July 23, 2023
- Short Term capital gains (holding period <= 2 years): At your slab rate
- Long Term Capital gains (holding period > 2 years): 20% after indexation
For properties bought before July 22, 2024 and sold on or after July 23, 2024
- Short Term capital gains (holding period <= 2 years): At your slab rate
- Long Term Capital gains (holding period > 2 years): Lower (20% after indexation, 12.5% without indexation)
For properties bought on or after July 23, 2024
- Short Term capital gains (holding period <= 2 years): At your slab rate
- Long Term Capital gains (holding period > 2 years): 12.5% without indexation
Hence, for the properties bought before July 23, 2024, you are unaffected by this change. You still have the choice of calculating capital gains after accounting for indexation and pay 20% tax on such calculated gains.
In fact, you are better off because you pay the lower of 20% with indexation and 12.5% after indexation. For a property investment that has done quite well, it is likely that you will be better off paying taxes at 12.5% without indexation.
Let’s understand with the help of a few examples.
Illustration 1
Purchase in FY2012. Sold in FY2025. Bought for 25 lacs. Sold for 55 lacs. You have made profit, but not a big profit. CAGR of ~6% p.a.
You are better paying taxes at 20% with indexation.
| Purchase year | FY2012 | |
| Sale Year | FY2025 | |
| CII (Year of Purchase) | 184 | |
| CII (Year of Sale) | 363 | |
| Sold Before July 23, 2024 | Sold On or After July 23, 2024 | |
| Purchase Value | 2,500,000 | 2,500,000 |
| Indexed Cost | 4,932,065 | 4,932,065 |
| Sale Value | 5,500,000 | 5,500,000 |
| Capital Gain (without indexation) | 3,000,000 | 3,000,000 |
| Capital Gain (with indexation) | 567,935 | 567,935 |
| Tax at 20% with Indexation (A) | 113,587 | 113,587 |
| Tax at 12.5% without Indexation (B) | NA | 375,000 |
| Final Tax Liability (Lower of A & B) | 113,587 | 113,587 |
Illustration 2
In the second example, the investment does well. The value grows from 25 lacs to 1.2 crores. CAGR of ~12.8% p.a. In this case, 12.5% without indexation turns out to be better.
| Purchase year | FY2012 | |
| Sale Year | FY2025 | |
| CII (Year of Purchase) | 184 | |
| CII (Year of Sale) | 363 | |
| Sold Before July 23, 2024 | Sold On or After July 23, 2024 | |
| Purchase Value | 2,500,000 | 2,500,000 |
| Indexed Cost | 4,932,065 | 4,932,065 |
| Sale Value | 12,000,000 | 12,000,000 |
| Capital Gain (without indexation) | 9,500,000 | 9,500,000 |
| Capital Gain (with indexation) | 7,067,935 | 7,067,935 |
| Tax at 20% with Indexation (A) | 1,413,587 | 1,413,587 |
| Tax at 12.5% without Indexation (B) | NA | 1,187,500 |
| Final Tax Liability (Lower of A & B) | 1,413,587 | 1,187,500 |
In the first example, you are better off under the old regime. 20% with indexation.
In the second example, you are better off under the new regime. 12.5% without indexation.
The good part is that, under both the illustrations, you can calculate tax liability under both the regimes (20% after indexation OR 12.5% without indexation) and pay the lower tax amount.
So, you are better off.
Are You Really Better Off?
Given what I have shared above, you might feel that you are better off, at least for the properties bought before July 23, 2024.
That’s true but there is a catch.
Given how the tax rules have been changed, you do not have to pay more capital gains tax on properties bought before July 23, 2024.
However, you have a problem if your real estate investment turned out to be a dud. In the past, with such poor performing investments, indexation could magnify your capital loss, and you could use this capital loss to set off gains from the sale of any other capital asset. You could also carry forward unutilized losses (if you didn’t have enough gains to set off against these losses) for the next 8 years. That reduced the pain of a poor investment to some extent.
In the previous 2 illustrations, the property value grew 6% and 12% p.a. annually. Not great, but not too bad either.
What if the property were to grow at say only 2% or show degrowth?
Illustration 1
| Purchase year | FY2012 | |
| Sale Year | FY2025 | |
| CII (Year of Purchase) | 184 | |
| CII (Year of Sale) | 363 | |
| Sold Before July 23, 2024 | Sold On or After July 23, 2024 | |
| Purchase Value | 2,500,000 | 2,500,000 |
| Indexed Cost | 4,932,065 | 4,932,065 |
| Sale Value | 4,000,000 | 4,000,000 |
| Capital Gain (without indexation) | 1,500,000 | 1,500,000 |
| Capital Gain (with indexation) | (932,065) | (932,065) |
| Tax at 20% with Indexation | – | – |
| Tax at 12.5% without Indexation | NA | 187,500 |
| Final Tax Liability | – | – |
| Capital Loss Booked | (932,065) | – |
Illustration 2
| Purchase year | FY2012 | |
| Sale Year | FY2025 | |
| CII (Year of Purchase) | 184 | |
| CII (Year of Sale) | 363 | |
| Sold Before July 23, 2024 | Sold On or After July 23, 2024 | |
| Purchase Value | 2,500,000 | 2,500,000 |
| Indexed Cost | 4,932,065 | 4,932,065 |
| Sale Value | 2,000,000 | 2,000,000 |
| Capital Gain (without indexation) | (500,000) | (500,000) |
| Capital Gain (with indexation) | (2,932,065) | (2,932,065) |
| Tax at 20% with Indexation | – | – |
| Tax at 12.5% without Indexation | NA | – |
| Final Tax Liability | – | – |
| Capital Loss Booked | (2,932,065) | (500,000) |
As you can see from the above examples, the tax liability is the same under both old and new arrangements. However, there is a difference in capital loss booked. The capital loss (if any) is much higher with indexation.
This is because, under the new arrangement, you must calculate the capital gain/loss calculation without indexation. And it is this capital loss (if any) that is allowed to be booked and carried forward.
The relief only comes at the time of calculating taxes, where you calculate taxes under both regimes (20% with indexation, 12.5% without indexation) and pay the lower amount. This relief does not change the capital gain/loss calculation.
How does this change affect you? Are you better off or worse off? Let me know in the comments section.