For years, the easiest dinner-table flex in India was a line that began with “You know what I bought that flat for?” and ended with a smug smile. Real estate wasn’t just an investment, it was a moral victory. Hold long enough and inflation would ensure you paid no to minimal tax. All thanks to indexation, a process that adjusts the cost of acquisition for inflation until the year of sale, effectively reducing your capital gains and the tax on them.
That quiet comfort ended last year.
The new capital-gains regime has turned one of India’s oldest wealth lessons on its head. Starting 23 July 2024, property sellers face a fork in the road: either pay 12.5% tax without indexation, or stick with the old but higher rate of 20% with indexation for assets bought before 23 July 2024.
It sounds technical, but the message is simple: the government wants money to move, not sit parked in brick and mortar.
How indexation built an illusion of safety
Indexation was genius in its simplicity. It inflated your purchase cost to match inflation, making long-term property gains look smaller, which in turn made taxes feel lighter.
Buy in 2010 for ₹50 lakh, sell in 2025 for ₹1.5 crore, and your inflation-adjusted cost would swell to around ₹1 crore. You paid 20% on ₹50 lakh, not ₹1 crore. Effective tax rate? Barely 10%. Every real estate connoisseur in every city loved that story.
But over time, it created a peculiar behaviour where people stopped thinking of property as an asset and started treating it as an heirloom with tax benefits.
Moreover, India’s wealth psychology has historically been built on patience. Land appreciated, gold glittered and the tax rules played along. Now, that mindset is outdated.
For properties bought after 23 July 2024, taxpayers have no choice but to pay 12.5% as the long-term capital-gains tax rate. Removing indexation quietly tilts the game toward financial assets and forces prospective buyers to think like portfolio managers — to choose, compute and optimise, not just rely on time and inflation. Property, with its registration headaches, liquidity issues, capital-gains math and TDS norms, looks less automatic as a “wealth store”, while mutual funds, bonds and even direct equities suddenly look cleaner and easier to exit.
Why the rule had to change
For policymakers, indexation became a fossil over time—complex, litigated, and increasingly out of sync with a new economy. A flat 12.5% rate feels cleaner, easier to administer and aligned with the broader tax-simplification push.
Startups get easier exit rules. Capital markets reward churn. ESOPs are taxed when exercised and not at listing. The message is consistent: keep capital agile. Property, the old symbol of stability, was the last holdout that didn’t fit this philosophy of encouraging liquidity in the economy.
In my opinion, this is not a punishment. Rather, the government is nudging investors to treat property as part of a strategy, not the entire strategy.
What smart taxpayers will do
If the property you have was bought before 23 July 2024, run both numbers to check the total tax liability. Despite indexation gone, Section 54 and 54EC still shield gains from heavy taxation. You can use these tools to save tax by planning reinvestments early.
Prospective buyers must plan exits, not just entries, as property decisions are no longer tax-saving decisions, they’re portfolio events.
You may also want to rethink allocation. The new tax rules on real estate narrow the tax gap between real estate and other financial instruments, so lapping up the former for tax optimization is not a strategy any longer.
The takeaway
Real estate has not lost its charm (at least not due to this change), but it has lost its privilege. You can still build wealth with it, you just can’t hide behind time anymore.
So before you sell your flat or buy another, ask a simple question: Am I holding this because it grows, or because it used to save tax?
That answer, not the tax rate, will decide how wealthy you really become.
Vijaykumar Puri, partner at VPRP & Co LLP, Chartered Accountants
About the Author
