Dated tax trick or secret weapon: Can indexation still pack a punch?

Difference between 12.5% without indexation and 20% with it lies in the fine print, affecting your final tax bill

- Jash Kriplani

Budget 2024 scrapped the indexation benefit—a provision that allowed adjusting prices for inflation—to make tax rates uniform across asset classes. For real estate, the tax on long-term capital gains (LTCG)—when a property is held for at least two years—was reduced from 20% with the indexation benefit to 12.5% without it.

Following concerns that this could raise tax liability for real estate investors, the Centre introduced a grandfathering clause to allow indexation on properties bought before 23 July 2024—the day of the budget. Under the clause, if the new 12.5% tax rate results in a higher liability than the previous 20% rate with indexation, the excess tax will be ignored. However, if indexation results in capital loss—the cost of buying a property is higher than the sale price—it can no longer be set off against capital gains.

"There can be no capital loss due to indexation as indexation is only for computation of tax liability and not for the computation of capital gain," explained Gautam Nayak, partner at CNK & Associates. "Capital loss computed without indexation can be set off against other capital gains."

Here is a look at how capital losses can be used to reduce capital gains and carried forward under the new tax rate; and when indexation under the old rate may save more tax.

Set-off and carry forward

If the capital loss occurs without indexation, it can be utilized to set off gains and the unabsorbed losses can be carried forward.

Assuming Mr. A bought a property for ₹1 crore in FY02 and sold it for ₹80 lakh in FY25. Let's assume Mr. A made capital gains of ₹1 crore from a 2nd property. He can offset the ₹20 lakh capital loss against gains from the second property. He will pay tax on net capital gains of ₹80 lakh.