The Quiet Formula That Shrinks Your Capital Gains Tax: Understanding Indexation

For years, indexation acted like a quiet guardian for taxpayers. It adjusted the cost of assets for inflation, ensuring you paid tax only on real gains — not just the number printed on a sale deed. This mechanism came from Section 48 of the Income Tax Act, 1961, which outlines how capital gains are calculated.

However, with shifting policies & new tax regimes, indexation has undergone major changes. In fact, starting 23rd July 2024, indexation benefit is not available for any asset, except in specific cases like transfers of land or buildings acquired before a certain cut-off date.

Let’s unpack the story behind this rule — gently, simply, and with examples that make sense to everyday taxpayers.

What Is Indexation?

Before diving into the law, let’s explain it in a simple way: 

Imagine buying a plot of land in 2005 for ₹10 lakh.
If you sell it in 2024 for ₹50 lakh, it looks like you made ₹40 lakh profit.
But did you, really?

₹10 lakh in 2005 is nowhere close to ₹10 lakh today. Inflation silently changes everything — the market, value, even your purchasing power."

Indexation adjusts the original cost to match today’s inflation.
It’s basically tax saying:
“We understand money changes value. Let’s be fair.”

Section 48: The Legal Home of Indexation

The concept of indexation in the Income Tax Act, 1961, is primarily governed by Section 48.

Section 48 explains how capital gains are calculated:

• Start with the full value of consideration (sale price)
• Deduct the indexed cost of acquisition
• Deduct the indexed cost of improvement
• Deduct expenses related to the transfer

This mechanism — introduced through provisos under Section 48 — provided the indexation benefit for long-term capital assets. This helped taxpayers reduce their capital gains tax burden, especially for assets held over long periods.

What Changed on 23rd July 2024?

Starting 23rd July 2024, indexation benefit is not available for any asset.

This change came as part of the updated capital gains regime.

The idea was to simplify taxation by merging different categories of assets & standardizing tax treatment.
But in doing so, indexation — a much-loved benefit — was removed, except for a few exceptions.

Also Read: Capital Gains, Deductions & Computation Explained

The One Major Exception: Land or Building Acquired Before Cut-Off Date

Even after July 2024, one category still enjoys indexation:

In case of transfer of land or building acquired before a specified date, indexation continues to apply. This protects people who bought homes or land long ago, when prices were drastically lower. It would be unfair to remove indexation retrospectively for such assets.

While the cut-off date may vary depending on notifications, guidelines, or interpretation, the government’s intention is to protect older long-term real estate investments.

A Simple Example to Show the Difference

Before July 2024 (with indexation):

• Cost in 2002: ₹5 lakh
• Indexed cost in 2024: ~₹20 lakh
• Selling price: ₹35 lakh
• Taxable gain: ₹15 lakh

After July 2024 (no indexation):

• Cost: ₹5 lakh
• Selling price: ₹35 lakh
• Taxable gain: ₹30 lakh

The tax difference? Huge.
And that’s why understanding the new rules is so important.

Why Indexation Was Removed

While no taxpayer enjoys losing a benefit, the government had reasons:

• The earlier system had multiple categories of capital assets
• Different holding periods added complexity
• Indexation required a rising set of cost inflation index (CII) numbers"
• Simplified tax structures aim to reduce disputes & litigation

However, removing indexation increases tax liabilities, especially for long-held assets.

Also Read: Cost Inflation Index (CII) FY 2025–26: The Number That Can Cut Your Capital Gains Tax

Does Indexation Still Apply to Debt Mutual Funds?

No — the rules changed earlier.
Debt mutual funds & many hybrid funds lost indexation benefits under the 2023 reforms.

The July 2024 changes simply expanded the no-indexation rule to all capital assets, except specific real estate cases.

How This Impacts You (Explained Like a Friend)

1. You may pay higher tax when selling assets: Especially property bought many years ago.
2. Financial planning becomes more important: Your CA or financial advisor might now suggest holding periods or sale timings differently.
3. Older property owners still have relief: If your property was purchased before the cut-off date, indexation protects you.
4. Cost records matter more than ever: Invoices, stamp duty receipts, improvement bills — everything counts.

Why This Rule Matters

I’ve watched people sell property that their parents bought decades ago. The emotional connection is deep, and so is the financial complexity.
Indexation used to soften the burden."
Now, understanding Section 48 becomes even more essential to avoid unpleasant surprises.

Also Read: How to Save Tax on Long-Term Capital Gains from House Property

Key Takeaways About Indexation

• Indexation is governed by Section 48 of the Income Tax Act.
• It adjusts cost for inflation to calculate capital gains fairly.
• It once applied to long-term capital assets like property, mutual funds, gold, etc.
• Starting 23rd July 2024, indexation benefit is not available for any asset.
• Exception exists for transfer of land/building acquired before a specified date.
• New rules mean taxpayers must plan sales more strategically.

Conclusion

Indexation was one of the most taxpayer-friendly mechanisms in the old capital gains regime. While times have changed & benefits have narrowed, the logic behind Section 48 still matters. Understanding how costs are computed, what counts as capital gains, and when indexation applies can significantly impact your tax outcome.

And if you ever feel unsure while planning a property sale or calculating capital gains, the experts at CallMyCA.com can guide you with clarity, confidence, and genuine care.