How to Calculate Indexation on Property?

I’d like to share the new rule that came up regarding how to calculate indexation cost of property. The Finance Bill, introduced in Parliament on (23.07.2024) Tuesday, proposed to eliminate the previously available indexation for the computation of any long-term capital gains on real estate, gold, and other unlisted assets.

How to Calculate Indexation of Property?

In light of the Union Budget 2024–2025, if you intend to sell your old property, be ready for higher taxes on the sale.

The majority of property owners would be impacted by the changes to long-term capital gains taxation that Finance Minister Nirmala Sitharaman revealed during her address. These changes include the elimination of the indexation benefit for capital gains tax on real estate sales.

The Finance Minister lowered the long-term capital gains tax (LTCG) rate from 20% to 12.5% and removed the indexation clause for real estate assets in an attempt to streamline the tax system.

Although Nirmala Sitharaman stated that the reform will result in a decrease in average taxes overall, experts caution that property owners—especially those who have owned their properties for longer than five years—may face an increased effective tax burden on their long-term capital gains (LTCG).

I hope this answers your query on how to calculate property indexation.

Read More:

The indexation value of property is the adjusted purchase price of a property, taking into account inflation. It is used to calculate capital gains tax, by lowering the amount of profit that is taxable. I am real estate for more than a decade now so I can explain how to calculate indexation of property. The indexation cost is calculated as (Purchase Price * CII for the year of sale) / CII for the year of purchase). This is the formula you can use to calculate the property indexation.

How to calculate property indexation?

Let me share an example to help you get the index value of a property. 

Assume that you bought a property for Rs. 10 lakhs in 2010 and sold it for Rs. 15 lakhs in 2023. The Cost Inflation Index (CII) for the year 2010 is 166 and the CII for the year 2023 is 289. Therefore, the indexation value of the property would be calculated as follows:

Indexed Cost of Acquisition = (10 lakhs * 289) / 166 = Rs. 175,781

This means that your capital gains would be reduced to Rs. 3,219 (15 lakhs - 175,781).

This is how you get the index value calculation for property.

Read More:

I know that indexation is the process of accounting for inflation in the acquisition cost of an asset. Indexation helps a taxpayer to account for how inflation will affect the price of the property. In simple words, indexation reduces the amount of capital gains that would be subject to tax. But for that, you need to be aware of how to calculate index value of property. I researched a little about it, so I can help you with this question.

How to calculate indexation on property in India?

A property seller can reduce their capital gains tax obligation with the help of indexation. We know that according to the Indian Income Tax Act, the profit that is gained through the sale of a property is taxable. But here’s the catch! The owner can use indexation to drastically reduce his/her remaining tax obligation on the earnings.

As per the latest tax regulations in India, indexation is a very useful method of reducing tax obligation on returns that are received from the sale of long-term assets like real estate. 

How to calculate indexed cost of property?

Let's assume that you spent Rs 10 lakhs on buying a house in 2013–14, and you sold it for Rs 50 lakhs in the year 2020. So, you would now be required to pay a long-term capital gains tax (LTCG) on a profit of Rs. 40 lakhs, if the capital gains on this profit is calculated by the tax authorities. In such case, the cost of acquisition would increase proportionately to the rise in inflation. The capital gains are then taxed at 20% or 10% + surcharge and 4% education cess, depending on how the index price was determined.

Formula for property index calculation

The purchase price should be multiplied by the CII for the year the sale is made in order to get the property's indexed cost, which should then be divided by the CII for the year it was purchased.

(CII for the year of sale/CII for the year of purchase) x Actual purchase price is the formula for calculating the indexed cost (or inflation-adjusted cost price).

Now you know how to calculate indexation on sale of property.

Hey Buddy,

The capital gains tax obligation of a property seller might be decreased through indexation. According to the Indian Income Tax Act, the profit made by selling real estate is subject to tax. The use of indexation, however, enables the owner to drastically reduce his remaining tax obligation on the earnings. I was reading the prior response, and I completely agree with the indexation formula he provided in his response.

Indexation is the process of accounting for inflation in an asset's acquisition price. Index of property enables the taxpayer to account for how inflation will affect prior acquisition costs. In essence, this reduces the number of capital gains that would be subject to tax.

In accordance with Section 48 of the Income Tax Act of 1961, the Cost Inflation Index (CII) is used to determine the indexed costs of acquisition and indexed costs of improvement of capital assets for determining long-term capital gains. In accordance with the law, the Central Government may notify the CII for any fiscal year. 

The Central Board of Direct Taxes (CBDT) has announced the

property index value

for FY 2022–23 as 331 via a notification dated Notification No. 62/2022 dated 14th June 2022, in accordance with the authority granted under Section 48 of the Income Tax Act. The number remained at 317 in the most recent fiscal year (FY 2021–21), a rise of 4.42 from the year before.

I would like to conclude here about the indexation formula. I hope this helps:)

Read More:

As Aman mentioned, a person is required to pay income tax under the IT act if he earns profit through the property sale. However, he can lower his outstanding tax liability on the profit earned using indexation. Let’s understand the concept of the index value of property.

Index Value of Property

It’s the process of adjusting the buying price of a property for inflation. Indexation lets the taxpayer factor in the inflation’s impact on the acquisition’s historical cost. This helps lower the capital gains that would be taxed.

Indexation Calculation Formula

To get the indexed cost of the property, multiply the purchase cost with the Cost Inflation Index for the year in which the sale is made and then divide it by the Cost Inflation Index for the year when it was bought.

The formula to compute the inflation-adjusted cost price or indexed cost =

Actual purchase price x (Cost Inflation Index for the year of sale/Cost Inflation Index for the year of purchase)

Benefits of Indexation for Property Buyers

Let’s assume a property was bought in F.Y.1992 for Rs. 20,00,000. The Cost Inflation Index for that year is 199.

Let’s assume this property was sold for Rs. 80,00,000 in F.Y.2009. The Cost Inflation Index for that year is 582.

Now, apply the formula for indexed cost:

Actual cost x (Cost Inflation Index for the year of sale/ Cost Inflation Index for the year of purchase)

= Rs. 20,00,000 x (582/199) = Rs 58.49 lacs.

This means the seller will be required to pay LTCG tax on the difference between Rs. 58.49 lacs and Rs. 80 lacs, after applying the indexation benefit. In this way, the LTCG liability will be Rs 21.51 lacs.

Indexation Calculator for Property

The Income Tax Department offers some calculators for easy calculation.

You can also use the calculator shared by Aman.

Read more:

I hope now you know all about the index value of property.

You are liable to pay tax under the Indian Income Tax Act if you earn profit through the sale of the property. By using indexation benefits, you can lower the outstanding tax liability on the proceeds earned. Indexation is known as the process of adjusting the purchase cost of an asset, for inflation. Let me tell you how to calculate indexation on property as well as about the property indexation calculator.

Indexed cost =  Actual Purchase Price x (CII for the year of sale / CII for the year of purchase)

Let me explain this using an example: If a property bought in 1991-1992 for Rs. 20,00,000 were to be sold in F.Y. 2009-2010 for Rs 80,00,000, then the indexed cost would be (632/199) x 20,00,000 = Rs 63.51 lakh. Plus, the long-term capital gains will be Rs. 80 lakh - Rs 63.51 lakh = Rs. 16.48 lakhs.

If you think the calculation is a bit difficult for you, then you can just use this property indexation calculator:

The CII for long-term capital assets sold after 1st April 2017:

I hope now you know how to calculate indexation on property.