Income tax saving: Sold land, house or jewellery? Know how indexation benefit can help you lower your long-term capital gains

Income tax saving: Sold land, house or jewellery? Know how indexation benefit can help you lower your long-term capital gains

The value of Rs 100 in 2024 is not the same as it was in 1990. This is because inflation has reduced the purchasing power of Rs 100 over the years. So why should you pay income tax on long-term capital gains without factoring in inflation? Rather than inflationary gain, it is fair to pay income tax only on real gain. This is why the Income Tax law allows you to take advantage of indexation. It helps you to get a discount for inflation over the current price of the asset and get the inflation-adjusted present value of your capital gains.

“Indexation is a mechanism which is used to adjust the current price of a capital asset to reflect the effect of inflation on it in comparison to the date of its actual purchase. With the help of indexation, one can lower the Long-Term Capital Gain (LTCG) and corresponding tax applicable on it at the time of sale of such capital asset,” says Daizy Chawla, Managing Partner, S&A Law Offices.

So, you must use indexation to your advantage and pay a lower long-term capital gains tax. However, do note that this benefit is not available for every capital asset.

How does indexation work?

As per income tax laws, the indexation benefit is only available for long-term gains from capital assets. Regarding short-term gains from capital assets, you must note that indexation benefit is not available.

Ravi Sawana, Associate Partner, Lakshmikumaran & Sridharan (LKS), a law firm explains the concept of indexation with an example:

The example is about LTCG from the sale of a debt-oriented mutual fund which was bought in 2012.10,000 Units of a debt mutual fund were purchased at Rs 10 per unit on September 30, 2012. The said 10,000 units of the mutual fund were sold on June 13, 2024, at Rs 50 per unit. Cost Inflation Indexes for FY 2024-25 is 363 and for FY 2012-13, it was 200.Table 1: Calculation of LTCG with benefit of indexation

Indexation 1

In the above table indexation benefits were taken for the sale of debt mutual funds since those were purchased in 2012. “With effect from April 1, 2023, the indexation benefit is not available on debt mutual funds except those which have been acquired before April 1, 2023,” says Chawla.

On which assets can you claim indexation benefits?

Income tax laws have defined the term long-term gains from the sale of a specified capital asset.

Sawana explains when the gain on a capital asset will be considered long-term capital gain where you can claim indexation benefits:

Nature of Asset Time period for which it is held and then sold
Land and or building; unlisted shares Held for more than 24 months
Any other specified assets (such as gold jewellery) Held for more than 36 months
Specified debt mutual funds* Held for more than 36 months

Source: Ravi Sawana, Associate Partner, Lakshmikumaran & Sridharan
*Which were purchased before April 1, 2023

You can’t avail of indexation benefits on these assets

Indexation benefits are available only on long-term capital gains from the sale of specified capital assets. According to Sawana, the benefit of indexation is available to all assets classified as ‘long term-capital assets’, except the following:

  • Transfer of shares and debentures of an Indian company by a non-resident
  • LTCG on sale of equity shares/equity oriented mutual funds covered in section 112A and where STT was paid
  • On transfer of any bond or debenture except capital-indexed bonds and Sovereign Gold Bonds (SGBs).

Is indexation available on hybrid, gold, and international mutual fund?

As per Preeti Puri, Senior Associate, S&A, a law firm, “There is no restriction on claiming indexation benefits concerning hybrid mutual funds, which invests more than 35% of its total proceeds in equity shares of domestic companies. There are also few other long-term capital assets on which no indexation benefits are available if acquired after April 1, 2023, like international mutual fund schemes, gold mutual fund schemes, etc.”

What happens if the equity investment of a hybrid mutual fund scheme is less than 35%? “In case the investment is less than 35% in equity shares of domestic companies then the benefit of indexation is not available and capital gain is taxable at applicable slab rate,” explains Puri.

How does indexation benefit work in the case of house property deals

Chawla shares an example where a house property that was originally bought in May 2011 and sold in June 2024.
Example 1: An individual purchased a property for Rs 30 lakh in May 2011 and sold it for Rs 70 lakh in June 2024. Further, he spent an amount equivalent to Rs 25,000 on brokerage and commission at the time of sale. In this case, as the capital asset has been kept for more than 24 months, it will be the case of long-term capital gain (LTCG).

Table 2: Calculation of LTCG from sale of a house property

Particulars Amount (In Rs)
Selling price of property 70,00,000
Less: Cost of transfer, such as brokerage, commission, etc. 25,000
Net sale Consideration 69,75,000
Less: Indexed Cost of Acquisition (Purchase price of the property in FY2011*CII of FY2024/CII FY2011) 59,18,478(30,00,000×363/184)
Gross long-term capital gain 10,56,522

Source: Daizy Chawla, Managing Partner, S&A Law office

According to Chartered accountant Shreya Jaiswal, many taxpayers do not know that they can avail of indexation benefits on the cost of improvements made in the house at the time of the sale of the property.

“Usually when people are living in their own houses, they tend to get a lot of structural changes done in the property like renovations. Now indexation benefits can be claimed on these expenses on renovations while selling their property. However, the majority of the taxpayers are not aware of this. Because of this, they do not maintain any records such as bills and proof payments of these expenses due to which they end up paying higher taxes,” she said.

So, maintaining a record of your expenses over renovation and structural changes will help you claim higher indexation benefits and lower your long-term capital gain tax outflow.

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