INDEXATION (Syllabus: GS Paper 3 – Economy)

Context: In the Union Budget 2024 speech, the Finance Minister of India announced the removal of indexation benefits for property sales, signaling a major shift in tax policy for real estate transactions.

Indexation 

• About: It refers to the adjustment of the cost of an asset for inflation while calculating capital gains for taxation purposes in India. In real estate, this asset can be any property.
• Calculation: The Cost Inflation Index (CII) is used by the income-tax department to adjust the acquisition cost for inflation. This adjustment lowers long-term capital gains tax. 

oThe CII is published annually by the central government.

• Base Year: Initially set at 1981, the base year for CII was later changed to 2001 with a base value of 100. 
• The Budget has removed the indexation benefit for all assets except property acquired before 2001. This change is expected to increase capital gains tax on long-term capital assets.
• Indexation Works: Indexation adjusts the purchase price of a property to account for inflation. The capital gain is calculated as the difference between the selling price and the inflation-adjusted purchase price. A 20% tax was previously applied to these gains.
• Benefit: Indexation helps taxpayers by accounting for inflation, reducing the taxable amount of capital gains and thereby lowering the tax liability.
• Changes with Budget 2024: From July 23, indexation benefits will no longer apply to properties sold. 

o Sellers will pay a 12.5% tax on the difference between the selling price and the original price. Indexation benefits will still be available for properties bought before April 1, 2001. 

o For properties purchased after this date, indexation benefits are no longer applicable.