In India’s taxation framework, Capital Gains Tax Indexation serves as a vital mechanism under the Income Tax Act, 1961. By adjusting the original purchase cost of an asset using the Cost Inflation Index (CII), indexation helps investors account for inflation and accurately determine real gains. This approach ensures that taxpayers are taxed on the genuine appreciation of their assets, rather than on inflation-induced price increases.
What is Indexation?
Indexation is a method used to adjust the purchase cost of an asset for inflation, ensuring that any subsequent capital gain is calculated more accurately. In India, this adjustment is done using the Cost Inflation Index (CII), which helps taxpayers account for inflationary effects and potentially reduces the overall capital gains tax liability.
What is Cost Inflation Index?
CII (Cost Inflation Index) is a yearly benchmark published by the Indian government to measure inflation. It’s primarily used to adjust the purchase price of assets for calculating long-term capital gains, ensuring investors aren’t taxed on inflation-induced price increases.
suggested Read: Capital Gains Tax on Sale of Property
Capital Gains Tax Indexation: Applicability
In India, indexation on capital gains tax is applicable on long term capital gains. Indexation adjusts the cost of acquisition for inflation, thereby reducing the taxable long-term capital gains.
Exemptions: Short term capital gains held for less than the prescribed period (e.g., stocks held for less than 12 months) do not qualify for indexation.
Eligible Assets:
- Real estate (typically held for more than 36 months)
- Debt mutual funds
- Gold and other precious metals
- Bonds
Check Out: Long Term Capital Gains Calculator
Historical Data of CII
| Financial year | Cost Inflation Index |
|---|---|
| 2024-25 | 363 |
| 2023-24 | 348 |
| 2022-23 | 331 |
| 2021-22 | 317 |
| 2020-21 | 301 |
| 2019-20 | 289 |
| 2018-19 | 280 |
| 2017-18 | 272 |
| 2016-17 | 264 |
| 2015-16 | 254 |
| 2014-15 | 240 |
| 2013-14 | 220 |
| 2012-13 | 200 |
| 2011-12 | 184 |
| 2010-11 | 167 |
| 2009-10 | 148 |
| 2008-09 | 137 |
| 2007-08 | 129 |
| 2006-07 | 122 |
| 2005-06 | 117 |
| 2004-05 | 113 |
| 2003-04 | 109 |
| 2002-03 | 105 |
| 2001-02 | 100 |
Capital Gains Indexation Eligibility and Rates
| Transfer Date | Asset Type | Tax Rate (%) | Indexation Benefit |
|---|---|---|---|
| On or after 23rd July 2024 | Assets other than land and building | 12.5% | Not applicable (no indexation) |
| On or before 22nd July 2024 | Assets other than land and building | 20% | With indexation benefit |
| For Land/Building (acquired before 23rd July 2024) | Land/Building | Option 1: 12.5% Option 2: 20% | Option 1: No indexation Option 2: With indexation |
Suggested Read: TDS on Sale of Property
Long Term Capital Gains Tax Calculation with Indexation Benefits
Mr. Ashish, a resident of Mumbai, purchased a residential property in 2007 for ₹30,00,000. Over the years, the property appreciated in value due to the city’s booming real estate market. Here are the transaction details:
Property Purchase Details:
- Purchase Price: ₹30,00,000
- Year of Purchase: 2007
Property Sale Details:
- Sale Price: ₹90,00,000
- Date of Sale: June 2024
| Steps | Formula | Calculation | Result |
|---|---|---|---|
| Calculate the CII | CII of sale year/ CII of purchase year | 363/ 129 | 2.814 |
| Inflation Adjusted Price | Purchase Price*Indexation Factor | ₹20,00,000 * 2.814 | ₹84,42,000 |
| Profit/ Long Term Capital Gains | Sale Price – Inflation Adjusted Price | ₹90,00,000 – ₹84,42,000 | ₹5,58,000 |
| Long Term Capital Gains Tax | Profit * 20% | ₹5,58,000 * 20% | ₹1,11,600 |
Capital Gains Tax Exemptions on Property
Long-term capital gains (LTCG) from the sale of property can be exempted or reduced if you reinvest the proceeds in specific ways. The main sections allowing these exemptions are:
- Section 54
- Section 54B
- Section 54F
- Section 54EC
| Section | Applicability | Reinvestment Requirement | Timeline for Reinvestment | Lock-in Period | Additional Notes |
|---|---|---|---|---|---|
| 54 | Gains from selling a residential property | Reinvest only the capital gain (not total sale proceeds). Can invest in up to two residential properties. But the total capital gain must not exceed ₹2 Cr. | Buy within 1 year before or 2 years after the sale. OR Construct within 3 years from the sale. | If you sell the new property within 3 years, exemption is revoked, and the earlier capital gain becomes taxable. | The two-property benefit is allowed only once. Use the Capital Gains Account Scheme (CGAS) if you can’t invest before filing your tax return. |
| 54F | Gains from selling a long-term capital asset other than a residential property | Must reinvest the entire sale proceeds (not just gains) to get full exemption. Partial exemption if only part of the proceeds is reinvested. | Buy within 1 year before or 2 years after the sale. OR Construct within 3 years from the sale. | If you sell the new property within 3 years, exemption is revoked, and the earlier capital gain becomes taxable. | Up to two residential properties can be purchased for claiming exemption. |
| 54EC | Gains from selling a residential property | Invest up to ₹50 Lakh of gains in NHAI or REC bonds. | Invest within 6 months of the sale or before filing your income tax return. If not invested immediately, deposit in CGAS and invest within 2 years. | The bonds have a 5-year lock-in | If the bond investment is not made within 6 months (or by ITR filing), the gain is taxed If you fail to invest after depositing in CGAS, the gain becomes short-term in the lapse year. |
| 54B | Gains from selling agricultural land (outside specified rural areas) | Reinvest the gains in new agricultural land within 2 years of selling the old land. | Purchase the new agricultural land within 2 years. Alternatively, deposit in CGAS before filing the return and then utilize within 2 years. | If you sell the new agricultural land within 3 years, the exemption is withdrawn, and you must pay tax on the earlier gain. | Rural land definition depends on distance from municipality/cantonment (2/6/8 km) and population criteria. If you don’t invest within 2 years, the gain becomes short-term in the year of lapse. |
Why Capital Gains with Indexation is a Superior Choice?
Capital gains with indexation generally offer a significant advantage for long-term assets. Here’s why:
- Inflation Adjustment: Indexation adjusts your asset’s original cost for inflation, ensuring that you’re only taxed on the real increase in value rather than the nominal gain.
- Reduction in Taxable Gain: Although the applicable tax rate with indexation may be higher (20% versus 12.5% without indexation), the inflation adjustment typically results in a considerably lower taxable gain, reducing your overall tax liability.
- Optimal for Long-Term Holdings: For assets such as real estate, debt mutual funds, or gold held over many years, the benefits of indexation become more pronounced, making it a favorable option in most scenarios.
Suggested Read: Union Budget 2025 for Homebuyers
Conclusion
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Frequently Asked Questions
Multiply your original purchase price by the ratio of the Cost Inflation Index (CII) in the sale year to the CII in the purchase year. Subtract this inflation-adjusted cost from your sale price to find the taxable gain.
No, as of July 23, 2024, the tax rate on long-term capital gains without indexation is 12.5%. Previously, certain assets were taxed at 10% without indexation, but this has been revised.
Effective July 23, 2024, taxpayers can choose between a 12.5% tax rate without indexation or a 20% rate with indexation for properties acquired before this date. Properties acquired after July 23, 2024, are taxed at 12.5% without indexation.
The Cost Inflation Index (CII) value for the 2024–25 tax year is 363.
Yes, reinvesting the gains in another residential property within specified timeframes can provide exemptions under sections like 54 and 54F of the Income Tax Act. Additionally, investing in specified bonds under Section 54EC can offer tax relief.
For real estate held over 24 months, it’s considered a long-term asset. Calculate the gain by subtracting the (indexed) purchase price and associated costs from the sale price. Depending on the acquisition date, apply the appropriate tax rate: 12.5% without indexation or 20% with indexation.
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