Capital gains tax overhaul: Why indexation remains crucial for LTCG calculations in real estate, gol

India’s evolving capital gains tax regime is reshaping how investors approach assets such as equities, mutual funds, gold, and real estate. But among all the changes introduced after the 2024 Union Budget, the withdrawal of indexation benefits for property purchases after July 23, 2024 has triggered the sharpest debate among tax experts and investors alike. At the core of the debate is whether taxpayers should be taxed on genuine gains or gains inflated by inflation over time.

According to Rahul Charkha, Partner, Economic Laws Practice, indexation has historically ensured fairness in the taxation of long-term property investments. “Indexation adjusts the original cost of acquisition of a property to account for inflation, thereby ensuring that tax is computed only on real appreciation in value rather than inflation-driven increases,” Charkha told Fortune India. 

He explained that a property bought for ₹50 lakh a decade ago could today have an indexed cost of ₹80-85 lakh, significantly reducing the taxable capital gain. Until July 23, 2024, long-term capital gains (LTCG) on immovable property were taxed at 20% with indexation benefits. Under the revised framework, properties acquired on or after that date attract a flat 12.5% LTCG tax without indexation. 

However, the government has retained a grandfathering provision for individuals and Hindu Undivided Families (HUFs), allowing them to choose between the old 20% tax regime with indexation and the new 12.5% regime without indexation for older properties. 

“At its core, indexation has been regarded as an instrument of equity and fairness in the capital gains tax framework,” Charkha said. “It ensures that taxpayers are charged only on the income they have actually earned, and not on gains inflated merely owing to the passage of time.” 

Bigger tax relief for long-term holdings? 

Prof. Abhishek Mishra, Chair of Admissions and Outreach, School of Law, BML Munjal University, said indexation works by adjusting the purchase price of an asset using the Cost Inflation Index (CII), which is notified annually by the Income Tax Department. 

It is calculated based on the Cost Inflation Index, which is notified annually by the Income Tax Department. The formula is: Indexed Cost = (CII of Sale Year ÷ CII of Purchase Year) × Original Cost. For FY26, the CII is fixed at 367. 

Mishra noted that the benefit becomes particularly significant for long-held properties where inflation substantially erodes real returns. 

“The indexed purchase price becomes significantly higher than the original purchase price, leading to a lower long-term capital gains tax liability,” he said. He added that removal of indexation for newer properties may discourage investors from holding real estate assets for longer durations and could potentially increase transaction activity in the property market. 

Push for simplification and uniformity 

Manoj Purohit, Partner & Leader, Financial Services Tax, Tax & Regulatory Advisory, BDO India, said the government has been attempting to simplify and standardise capital gains taxation across asset classes. “In the recent past, the government has tried to simplify the tax rates on capital gains in order to bring simplicity and parity across all asset classes,” he said.

Purohit noted that while most long-term assets are now broadly taxed at 12.5%, equities still enjoy relatively favourable treatment. 

He also pointed out that indexation acted as an inflation shield for property investors by reducing the effective taxable gain. “The government can consider restoring indexation benefits to safeguard investor interest and encourage long-term investment behaviour,” he said. 

As policymakers continue reviewing India’s capital gains framework, experts believe the larger challenge will be balancing tax simplification with fairness for long-term investors navigating an inflationary economy. 

Why experts still view indexation as essential 

Riaz Thingna, Partner, Grant Thornton Bharat, described indexation as a “fair correction for inflation” rather than a tax concession. He said, for example, if a property was acquired in FY04–05 for ₹20 lakh (CII: 113) and the CII for FY25-26 is 376, the indexed cost becomes ₹66.55 lakh (20 × 376/113). If the property is sold for ₹80 lakh, the resulting long-term capital gain is ₹13.45 lakh instead of ₹60 lakh, leading to significant tax savings