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Indexation is a commonly used term in the real estate industry. By using indexation, investors can get an estimate about the total gain or losses incurred on investments. In this article, we will explain what indexation is in real estate.
Indexation is a method through which a real estate asset’s purchase price is adjusted based on the prevailing inflation rate. With the help of indexation, the impact of inflation, cost of living or input prices can be adjusted over time.
Inflation allows the investors to clearly determine their capital gains and ensure that the taxes are only levied on their real gains which surpass inflation. This results in a fair taxation process.
Indexation Rate is calculated using Cost Inflation Index (CII). Cost inflation index is calculated as (Index for the year of sale/Index for the year of acquisition) x cost. CII is fixed by the Central Government and it is published in the official gazette for measuring inflation. This index is notified for each year by the Government. CII is defined under Section 48 of the Income Tax Act, 1961.
Cost Inflation Index (FY 2010 - 2011 to FY 2024 - 2025)
Let’s check out the cost inflation index for the past 15 years in the table below.
Indexation benefit means to adjust the asset’s purchase price for inflation while doing capital gains tax computation.
Budget 2024 Update: Indexation Benefit Discontinued
The indexation benefit, as per 2024 Budget update, has been discontinued by the government on long-term capital gains. It means that the purchase price of investment assets can no longer be adjusted by the investors when calculating capital gains for tax purposes.
The long-term capital gains will now be computed on the basis of the actual purchase price. This will result in higher taxable gains and increase the tax liability for investors.
Indexation is beneficial for real estate investors. It helps to adjust the real estate asset’s value as per the economy’s inflation level. It reduces the tax burden of investors by adjusting the acquisition cost as per inflation. This results in reducing the taxes on gains. However, now, the indexation on long-term capital gains has been discontinued after the 2024 Union Budget.
Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.
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