What are the effects of removal of indexation benefit?

The removal of indexation in Budget 2024 is expected to raise taxable gains on property sales, leading to higher tax liabilities . This change could dampen investor sentiment, potentially decrease property prices, and investors might shift their investment preferences.

What is the indexation benefit?

Indexation will reduce your overall tax liability by adjusting the purchase price of the underlying asset or investment . You will be able to realise higher gains as you can adjust them against the rate of inflation of the year of purchase and sale. We have covered the following in this article.

What does indexation changes mean?

Indexation is a standard process used to adjust the value of government programs for changes in the level of prices, living costs or wages . In general, indexation aims to maintain the relative value or level of policy settings over time.

What is the indexation rule?

In simple terms, indexation helps adjust the purchase cost of a property for inflation, effectively increasing the cost of the asset and reducing the taxable capital gains . Without this benefit, the tax payable on capital gains could be significantly higher, especially for real estate assets with lower appreciation.

Will indexation be restored?

Summary. The finance minister is expected to amend the finance bill to restore the indexation benefit for property acquired before 23 July 2024 . This means taxpayers can choose between the new tax regime with a lower rate but no indexation, and the old regime with a higher rate but indexation benefits.

Is there still an indexation allowance on capital gains?

It is part of a disposal of the shares. The indexation allowance no longer applies to individuals and was frozen for companies on 31 December 2017 . An Income Tax Trading loss may be offset against capital gains.

How to do indexation for capital gains?

In case of long-term capital gain, capital gain = final sale price - (transfer cost + indexed acquisition cost + indexed house improvement cost) .

When was indexation allowance abolished?

For individuals, indexation allowance was frozen in 1998 and then eliminated in 2008 .

What is the purpose of indexation allowance?

What does Indexation allowance mean? An allowance applicable to corporation tax liabilities in respect of chargeable gains, which seeks to compensate the taxpayer for the effects of inflation . On a disposal by a company, indexation allowance is calculated up to the month of disposal.

Can indexation allowance create a loss?

Please note that the indexation allowance cannot create or increase a capital loss . The allowance is calculated by multiplying the base cost of the asset by the change in the retail price index from the date when such expenditure was incurred to the date of disposal (or deemed disposal).

Is indexation a good thing?

The primary reason why indexation is beneficial is to offset inflation . By using indexation, you can adjust an investment's purchase price to reflect the impact of inflation more accurately. This carries over into tax liability because a higher purchase price leads to lower profits and lower taxes.

Indexation benefit removed on selling property: What is indexation benefit, what has changed

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Jul 25, 2024, 03:16:45 PM IST

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What is indexation benefit?

Indexation is used to adjust an investment's purchase price to reflect inflation's effect on it. This particular provision in the tax code enabled taxpayers to benefit from significantly reducing their tax payments based on the duration they owned a property. In cases where inflation outpaced the increase in property value or if the property lost value, taxpayers could claim a capital loss. This allowed them to offset taxes on other capital gains incurred during the year, potentially reducing their overall tax liability.

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How is it calculated?

The income-tax department uses cost inflationindex (CII) to calculate the inflation-adjusted cost of acquiring speci?ed assets. Adjusting to inflation increases the acquisition cost, thus reducing the long-term capital gains tax. Every year, the central govt publishes CII through its official gazette.

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What is the base year?

Initially, I-T department had set 1981 as the base year and later shifted it to 2001, with a base value of 100. Each year’s index is computed relative to this base. The formula to calculate the inflation-adjusted cost is : Indexed cost of acquisition = (Cost of acquisition * CII of year of sale)/CII of year of purchase.

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What has changed?

Budget eliminates indexation benefit for all assets (barring property acquired prior to 2001). This change is likely to lead to higher capital gains tax on sale of long-term capital assets.

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What has changed in Budget 2024?

The Budget 2024 announced the removal of the indexation benefits available on the property sale. Due to this many people who sell their property will now not be able to inflate their purchase price and reduce their capital gains.

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What was the rule before

Previously, individuals in India could leverage what is known as the 'indexation benefit' to minimize the tax on the profit earned from selling a property. This benefit allowed the variance between the purchase and sale price of a property (i.e., the profit) to be adjusted by the prevailing inflation rate during the period when the property was owned. Therefore, it acted as a tool to mitigate the impact of inflation on taxable profits from property sales.

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What tax department has said

CBDT Chairman Ravi Agrawal said on Wednesday that the removal of indexation benefits from real estate transactions will benefit taxpayers when seen through the prism of "actual market dynamics" rather than plain mathematics. The CBDT chairman told PTI that the tax department did "some calculations" in this context before the measure announced by Union Finance Minister Nirmala Sitharaman on Tuesday in Parliament. Agrawal also underlined that the new system says there will be "less tax obligation" for a taxpayer here. Agrawal emphasized that despite concerns from some about the impact of removing indexation on the real estate market, the new scheme would generally be advantageous in most cases. He mentioned that there had been calls from different groups and taxpayers to streamline the capital gains system.

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