Removal of Indexation Benefit: The Impact on NRIs

In 1991, the Government appointed a Tax Reforms Committee under Prof Raja Chelliah to lay out the agenda for reforming India's tax system. In the Chelliah Committee Report it was clearly highlighted how the people’s purchasing power was greatly being eroded by inflation.

- Sreejith Kuniyil

Budget 2025, which has become law on March 29, 2025, has been widely praised by Indian citizens, particularly for its focus on the working and middle-class segments. A key highlight is the increased rebate slab, which now provides income tax exemption on income up to ₹12 lakh. However, the budget has left the NRI community disheartened, as their long-standing request for the restoration of indexation benefits on the sale of real estate properties remains unaddressed.

The Background

The Finance Bill, 2024, when first presented in the Lok Sabha on July 23, 2024, sought to introduce a significant shift in the landscape of capital gain taxation by proposing to eliminate the benefit of indexation on transfer of all long-term capital assets, including immovable properties, in the name of simplification of taxes.

This change marked a pivotal moment as the long-standing practice of adjusting gains for inflation was taken out and the impact is expected to be cushioned by the lowered capital gains tax rates of 12.5% without the benefit of indexation, as against the earlier rate of 20%.

In response to widespread public dissatisfaction that followed, the Bill was amended on August 7, 2024, and later received the presidential assent on 16 August 2024, allowing taxpayers to choose between:

(i) 20% with indexation; or

(ii) 12.5% without indexation in respect of all transfers relating to immovable properties acquired before July 23, 2024.