What is Indexation in Real Estate? Calculation and Latest Updates for 2025
Indexation in Real Estate Explained: Benefits & 2025 Updates
Indexation is a method used to adjust the purchase price of any commodity including property as per inflation for the time span between your purchase and sale. It ensures that you only pay tax on actual profit and not on the increase due to inflation.
Why is Indexation Important?
• Reduces tax on long-term capital gains
• Encourages holding property for more than two years
• Helps in better tax planning
Capital Gains Tax in Real Estate
When you sell a property, you earn a profit. This is called capital gains. The tax on this profit is called capital gains tax.
There are two types of capital gains:
1. Short-Term Capital Gains (STCG): If you sell within two years, gains are added to your income and taxed as per your slab.
2. Long-Term Capital Gains (LTCG): If you sell after two years, you pay 20% tax with indexation benefits.
How do you calculate property indexation?
Indexation reduces tax by adjusting the purchase price using the Cost Inflation Index (CII). The government updates the CII every year to reflect inflation.
Formula to Calculate Indexed Cost
Indexed Cost = (CII of Sale Year / CII of Purchase Year) × Purchase Price
What is an example of indexation?
Example Calculation
• Purchase Price: 40,00,000 in 2015-16 (CII = 254)
• Sale Price: 90,00,000 in 2024-25 (CII = 363)
Indexed Cost: (363 / 254) × 40,00,000 = 57,17,323
Long-Term Capital Gains: Sale Price - Indexed Cost = 90,00,000 - 57,17,323 = 32,82,677
Tax Liability (20% of LTCG): 20% of 32,82,677 = 6,56,535
Without Indexation: Tax would be 20% of (90,00,000 - 40,00,000) = 50 lacs and 20 percent of 50 lacs would be 10 lacs.
Indexation saves 3,43,465 in taxes!
Is indexation removed from property sales?
New Tax Rules For Indexation 2024-25
The Indian government introduced two options for LTCG tax:
1. 12.5% Tax Without Indexation – Lower tax rate but no inflation adjustment.
2. 20% Tax With Indexation – Higher rate but benefits from inflation adjustment.
Important Updates
1. Properties bought before July 23, 2024: Can choose either 12.5% without indexation or 20% with indexation.
2. Properties bought after July 23, 2024: Must pay 12.5% without indexation.
3. For NRIs: They must pay 12.5% tax without indexation on all property transactions after July 23, 2024.
Benefits of Indexation in Real Estate
Indexation in real estate helps reduce tax liability by adjusting property cost based on inflation. It allows for a higher cost base, thus reducing capital gains tax when the property is sold. This is especially beneficial in long-term holdings, where property prices rise significantly over time due to inflation.
Final Thoughts
Indexation is a powerful tool to save tax on long-term property sales. It ensures you are taxed only on actual gains, not on inflationary increases. Before selling your property, consult a tax expert. This helps in making better decisions and reducing tax payments legally.
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