WITH OR WITHOUT INDEXATION: WHEN DO HOMEOWNERS PAY LESS?

Calculating taxes under both methods-considering inflation and property appreciation-can yield a more precise result

- Meghna Maiti

In Union Budget 2024-25, the government removed the indexation benefits on sale of property. Union Minister of Finance Nirmala Sitharaman announced the removal of indexation benefits for property sales and reduced long-term capital gains (LTCG) tax from 20 per cent to 12.5 per cent. So, if you are selling a property, the difference between the buying and selling price will be taxed at a flat rate of 12.5 per cent.

However, on August 7, 2024 after an outrage by investors, some of whom would have needed to pay higher tax with the removal of indexation, the government declared an amendment to the Finance Bill, 2024.

"The amendment states that taxpayers can choose to either use indexation and pay a 20 per cent tax rate or forgo indexation and pay the reduced 12.5 per cent rate, allowing them to select the option that minimises their tax liability," says Ridhima Bhatia, deputy general manager, Taxmann, a tax consultant.

These two options have been provided to individual taxpayers and Hindu Undivided Families (HUFs) under both new and old tax regimes.

The availability of two options has however, created confusion. Let's first understand how indexation benefit works, and then analyse which works better for you.

Indexation Benefit

Indexation is a process where the original purchase price of an asset is indexed to inflation, allowing the taxpayers to factor in inflation when paying capital gains. The buying price of a property is revised upwards for the period for which it was held, reducing the capital gains amount.

For instance, if you bought a residential plot in April 2010 for ₹10 lakh and sold it in April 2024 for ₹25 lakh, the profit or capital gain before applying indexation would be calculated by the following formula: Capital Gain = Selling Price - Purchase Price. The capital gain will be ₹25 lakh - ₹10 lakh = ₹15 lakh.