Indexation removal on property and debt mutual funds: what s.48 says now and the 12.5%/20% choice
Finance (No. 2) Act 2024 removed indexation on property sold on or after 23 July 2024, but property bought before that date keeps a choice: 12.5% LTCG without indexation or 20% with indexation. Debt funds lost indexation on 1 April 2023. Worked example inside.
Harun Raaj
Chartered Accountant · Harun Raaj & Associates
For property and other long-term assets transferred on or after 23 July 2024, long-term capital gains are taxed at 12.5% without indexation under s.112 of the Income-tax Act, 1961 — but if you acquired the asset before 23 July 2024, you can choose the old 20% rate with indexation instead. The Finance (No. 2) Act, 2024 removed the indexation benefit that used to inflate your cost of acquisition under s.48, and compensated for it with a lower flat rate. Debt mutual funds were already moved onto the same slab-rate track a year earlier, on 1 April 2023. The choice between the two options is now arithmetic — and it reverses depending on how much your asset actually appreciated.
Staleness alert: A large share of property-tax content still assumes indexation is automatic and quotes 20% with indexation as the only route. For sales on or after 23 July 2024 the default is 12.5% without indexation, with the 20%-with-indexation route available only for assets acquired before 23 July 2024. Both numbers need to be computed before you commit to one.
What the law says now
The mechanism lives in three places:
For property acquired on or after 23 July 2024: only the 12.5% no-indexation route applies — the choice does not exist.
For property acquired before 23 July 2024 (including under a registered agreement before that date): you may choose, asset by asset, between:
- Option A — 12.5% on the un-indexed gain (simple, no CII), or
- Option B — 20% on the indexed gain (CII applied to cost of acquisition).
You pick whichever produces the lower tax. The choice is made in the return and must be supported by the working in Schedule CG.
The CII mechanics, in numbers
Indexed cost = Original cost × (CII of the year of sale ÷ CII of the year of purchase). The CII is notified annually by the CBDT. The values you will actually use:
Longer holding and a slower-appreciating asset both push the indexed route ahead, because the indexed cost grows with inflation while the 12.5% route ignores it.
Worked example: Amit sells a flat
Persona: Amit, resident individual, sold a residential flat in February 2025 (FY 2024-25).
Facts:
- Bought in FY 2018-19 for ₹50,00,000 (CII 280)
- Sold in February 2025 for ₹90,00,000 (CII 363)
- Acquired before 23 July 2024 → the 12.5%/20% choice is available
Option A — 12.5%, no indexation
Gain: ₹90,00,000 − ₹50,00,000 = ₹40,00,000.
Tax: ₹40,00,000 × 12.5% = ₹5,00,000, plus 4% cess = ₹5,20,000.
Option B — 20%, with indexation
Indexed cost: ₹50,00,000 × (363 ÷ 280) = ₹64,82,143.
Indexed gain: ₹90,00,000 − ₹64,82,143 = ₹25,17,857.
Tax: ₹25,17,857 × 20% = ₹5,03,571, plus 4% cess = ₹5,23,714.
Result: On these facts, Option A wins — marginally. ₹5,00,000 versus ₹5,03,571 before cess. The flat appreciated 80% while the CII rose only 29.6%, so the nominal gain is large enough that the lower 12.5% rate beats the inflation adjustment.
When does indexation win? Solve for the sale price at which Option B ties Option A:
0.20 × (S − 64,82,143) = 0.125 × (S − 50,00,000) → S ≈ ₹89.5 lakh. Sell below roughly ₹89.5 lakh and 20% with indexation wins; sell above it and 12.5% wins. The relationship is the same for every pre-23-Jul-2024 property: the more your gain outpaces the CII growth, the more attractive the flat 12.5% becomes.
FY 2025-26 variant (CII 389): the same flat sold today, ₹90 lakh, uses CII 389.
Indexed cost: ₹50,00,000 × (389 ÷ 280) = ₹69,46,429.
Indexed gain: ₹90,00,000 − ₹69,46,429 = ₹20,53,571. Tax at 20% = ₹4,10,714.
Now Option B wins clearly (₹4,10,714 vs ₹5,00,000) because two extra years of CII inflation (363 → 389) shrink the indexed gain further.
The practical rule: run both options. Reproduce the arithmetic with the Capital Gains Calculator 2025, which applies the CII and both rates.
Debt mutual funds: a separate, earlier change
Debt mutual funds are not part of the 23 July 2024 change — their indexation was already removed from 1 April 2023 by the Finance Act, 2023.
The holding-period test for "long-term" on debt funds remains 36 months, but for units bought on or after 1 April 2023 that status no longer earns a concessional rate — the gain is added to your income and taxed at your slab rate. Equity funds (≥65% equity) are untouched by this; they sit under s.112A at 12.5%/20%.
What changed for FY 2025-26: summary table
The property holding period for long-term treatment is unchanged at 24 months. Nothing about s.54 or the reinvestment exemptions changed at this cutover either — the removal of indexation applies to the taxable gain, and the exemption route under s.54 (subject to its own ₹10 crore cap) remains available.
Frequently asked questions
1. Is indexation completely gone for property now?
For new acquisitions, yes. Property bought on or after 23 July 2024 is taxed at 12.5% without indexation. Property bought before that date keeps the choice of 20% with indexation or 12.5% without.2. How do I know which option is cheaper?
Run the arithmetic. 20% with indexation wins when your nominal gain is modest relative to the CII rise; 12.5% wins when the gain outpaces inflation. In the example above the tie point was a sale of about ₹89.5 lakh on a ₹50 lakh cost.3. Do debt mutual funds get the same 12.5% rate?
No. Debt funds bought on or after 1 April 2023 are taxed at your slab rate with no indexation, regardless of holding period. The 12.5% rate is for s.112 assets transferred after 23 July 2024, not for debt funds.4. What CII should I use for a sale in FY 2025-26?
389 for the year of sale. Indexed cost = original cost × (CII of sale year ÷ CII of purchase year). Purchase-year CIIs are notified up to the current FY.5. Does the indexation change affect s.54 exemption?
No. Section 54 reinvestment relief still applies to the taxable long-term gain — but the exemption is capped at ₹10 crore per assessee from AY 2024-25, and the gain that remains after the exemption is taxed at the chosen rate.6. What about gold or unlisted shares sold after 23 July 2024?
Same 12.5% rule. Unlisted shares, gold, and other s.112 long-term assets transferred on or after 23 July 2024 are taxed at 12.5% without indexation, with the 20%-with-indexation choice for assets acquired before that date.---
Last verified: 2026-08-05 (FY 2025-26 / AY 2026-27)
Sources: s.48 and s.112, Income-tax Act, 1961, as amended by the Finance (No. 2) Act, 2024 (indexation removal and 12.5% rate w.e.f. 23-07-2024; proviso preserving the 20%-with-indexation choice for pre-23-07-2024 acquisitions); Finance Act, 2023 (s.50AA, debt-fund indexation removal w.e.f. 01-04-2023); CII notified by the CBDT for FY 2018-19 (280), FY 2024-25 (363), FY 2025-26 (389); s.54 (reinvestment exemption, ₹10 crore cap). Worked-example arithmetic reproducible from the figures above. For a property-sale computation before you commit to an option, book a consultation at harunraaj.com.
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