Definition
Indexation on Property
Indexation adjusts the purchase cost of a long-term-held property upward for inflation, so you are taxed only on the real gain, not the part caused by rising prices.
Using the government's cost inflation index, the original cost (and eligible improvement costs) is scaled up to today's value before computing the long-term capital gain. This lowers the taxable profit and therefore the tax — sometimes dramatically for properties held many years — recognising that some of the 'gain' merely reflects inflation rather than real wealth creation.
Indexation rules for property have been subject to legislative change, so the exact benefit depends on the law applicable to your sale and acquisition dates. Because it can significantly reduce the tax bill, sellers should compute gains both with and where applicable, and keep documented evidence of cost and improvements.
Related terms
- Inflation-Adjusted ReturnInflation-adjusted (or 'real') return is the return on an investment after subtracting the effect of inflation, showing the actual growth in your purchasing power.
- Real Estate Capital GainsReal estate capital gains are the profits you make when you sell a property for more than its cost, and they are taxable in India as short-term or long-term gains.
- Section 54Section 54 of the Income Tax Act lets an individual save tax on long-term capital gains from selling a residential house by reinvesting the gain in another residential house.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.